What is development finance and how does it work?
Development finance is a way for property developers to fund their projects. It can cover projects starting from ground level, building conversions or refurbishments.
Getting the finance is dependent on you finding a suitable lender and presenting your development plans. They will be particularly interested in the Gross Development Value (GDV) – how much the property will be worth once completed.
Most development finance lenders will offer you 100% of the build costs – but a lesser percentage for the purchase of land or property. Development finance is usually released in phases. At each point, you show the lender what’s been completed and they release the next phase of funding.
Who is eligible for Development Finance?
You can apply for development finance as an individual, a group of individuals, or through a company.
An important factor is having a good track record in repaying borrowed funds. Prior experience in completing development projects is also helpful, although some lenders may lend to less experienced customers at higher interest rates.
Can I get 100% development finance?
Lenders tend to offer borrowers up to 70% of the funds they need for the initial site purchase and 100% of the development costs – but you will usually need to be an experienced developer for this.
On your first development project, lenders usually require you to pay 50% towards the purchase of the land. However, you may be able to borrow more by securing the loan on other property or assets. We can help you explore the options.
How much does development finance cost?
Just like other financial products, development finance involves interest and fees. Interest varies from one lender to the next, and will depend on many factors. Borrowing a high percentage of the building costs, having less experience and commercial projects can mean higher interest rates.
Interest on property development loans may be charged annually or monthly. Arrangement fees are typically between 1% and 2% of the total, and you can add this to the loan.
On top of this, development finance sometimes includes an exit fee, payable on completion of the project. The way these are calculated can vary. If you won’t have the available cash flow to cover this exit fee, we can explore development exit finance with you.
When do I need to repay a development finance loan?
Generally, a development loan needs to be repaid in six months up to two years, depending on how you have set the finance up. The longer you take to repay the loan, the more interest you will pay, especially if there is a monthly interest fee.
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We help customers navigate the options available to them through clear information and guidance, this in turn enables them to understand their choices and make informed decisions.
What are the pros and cons of development finance?
The big benefit of development finance is that it’s a fast source of money to fund your project, whether it’s a residential project or a commercial development.
In terms of cons, the cost of borrowing can be quite high – interest rates are more than on a typical mortgage, so it’s best to use this type of finance as a short term loan. You may be able to refinance to a mortgage in the long term.
It’s also quite a complex area and it can be challenging to compare the different fees and interest rates. That’s why it’s so important to work with an experienced broker.
How do you get development finance?
Applying for development finance can be time-consuming and complicated, which is why people work with specialist brokers.
We look after the whole process – exploring your plans and helping make sure that you meet all the lender’s requirements. We recommend the most suitable options and check all the details are accurate so that the application goes through smoothly.
What if I have bad credit?
Bad credit isn’t necessarily a barrier to getting development finance, although it will depend how serious and recent your credit issues are. It’s often possible to get around bad credit by reducing the size of the total loan amount or paying higher interest rates.
What else do we need to consider for development finance?
Before you start seeking development finance make sure you are supported by an experienced and professional team – not just your broker, but also the builders you will be working with and any other specialists.
In our experience, developments nearly always have some kind of hiccup. Having a good team behind you can make all the difference in overcoming unexpected challenges.
We have supported development projects of all sizes, and regularly advise clients on development loans and bridging loans. We work with both specialist and high street providers and would be pleased to explain how we can help. We are registered in England & Wales and fully authorised and regulated by the Financial Conduct Authority.