Developing property for resale, investment, or personal residential use can be a lucrative way to generate income or advance in the property market. However, real estate development in the UK can be expensive, and many developers lack the necessary funds to pay upfront. Fortunately, development finance offers a solution by providing specialised loans to purchase land and cover construction costs. Don’t let a lack of cash limit your ambitions. Explore custom development loans and start building today.
What is Development Finance?
Development finance refers to loans that cover the costs of residential or commercial development projects. Unlike long-term mortgages, development financing is typically short-term, lasting between 6 and 24 months. These loans can be used to purchase land and cover construction costs, making them suitable for new builds, conversions, or refurbishments of existing properties.
Due to the high costs associated with UK real estate development and the need for cash to complete projects, development finance is becoming an increasingly popular option. It provides specialised loans for land purchase and contractor payments.
How Does Development Finance Work?
Property development finance funds residential or commercial development projects. Unlike traditional mortgages used to purchase existing properties, development finance is used to construct new properties or renovate existing ones. Since the development property may not yet exist or will undergo significant changes, these loans are based on the cost of development and the projected future value of the completed property. Factors such as Loan to Cost (LTC), Loan to Gross Development Value (LTGDV), the borrower’s track record, and their ability to repay are considered during the loan assessment.
With development loans, interest is usually rolled up or capitalised, meaning it is added to the loan balance rather than paid monthly. This approach prevents cash flow issues during construction, with the total interest paid upon the sale or refinancing of the properties.
Types of Development Finance
Development finance is tailored to specific projects and includes:
Residential Property Development
Commercial/Semi-Commercial Property Development
Renovations/Conversions/Refurbishments
New Builds
Single-Unit to Large Multi-Unit Developments
Development Exit Funding: Similar to bridging loans, used to finance a completed development until units are sold or refinanced.
Regulated Development Finance: Governed by the Financial Conduct Authority (FCA) for developments where more than 40% will be a residential dwelling.
Mezzanine Development Finance: Secondary borrowing to reduce the need for a large cash deposit, also known as a ‘junior loan’ or ‘junior mortgage’.
Some projects may require a mix of loan products. Professional advice is recommended to determine the best financing options for your project. Contact us to find out more.
The Process Explained
The development finance process typically involves:
Initial Enquiry: Free advice and formal application submission.
Agreement in Principle: Lender provides terms and conditions.
Due Diligence: Lender conducts site visits and valuations.
Projected Future Value Assessment: Lender estimates the development’s future value.
Formal Loan Offer: Accepted by the borrower.
Legal Documentation: Contracts are signed, and funds are released in stages.
Construction and Additional Drawdowns: Funds are drawn to cover build costs.
Loan Repayment: Usually upon sale or refinancing of the development.
Required documents may include planning permissions, project cost breakdowns, the borrower’s development experience, a schedule of works, details of contractors, current assets and liabilities, a proposed exit strategy, and the projected gross development value.
How Much Can I Borrow?
Development loans start from £200,000, with options available up to £50 million.
Interest Rates and Costs
Interest rates range from 7% to 15% APR. While interest rates are important, borrowers should also consider total deal costs, including fees and loan terms. Our team can help navigate these options to find the most competitive deal.
Typical Fees and Other Costs
Fees may include:
Lender Arrangement Fee
Broker Arrangement Fee
Monitoring Surveyor Fees
Exit Fees
Legal Fees
Non-Utilisation Fees
Management/Admin Fees
Example of New-Build Development Finance
Consider a project to build ten three-bedroom detached houses on a plot costing £600,000, with construction costs of £2,000,000, totaling £2,600,000. The estimated value of each house is £350,000, with a Gross Development Value (GDV) of £3,500,000.
Development finance could cover up to 70% of land costs (£420,000) and 90% of build costs (£1,800,000), totaling a loan facility of £2,220,000. Funds are released in stages, with an initial release of £420,000 for land purchase, and further drawdowns for construction costs. The developer contributes £180,000 in cash for the land purchase. The loan and interest are repaid upon the sale of the houses, with the developer retaining all profits.
For more details and to understand the options available to you, request a call back from our experienced team.
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