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Development Finance for Residential Properties

Development Finance for Residential Properties

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Residential development finance is a popular lending option for developers and property investors.

This guide explains how residential development finance works, who it is the best option for, and how to find the best rates on the UK market.

For more help and support, contact the Revolution Brokers team on 0330 304 3040 or drop us a message at info@revolutionbrokers.co.uk.

What Does Residential Development Finance Mean?

Residential development finance is lending designed to finance the construction of a residential property or development.

This runs over a shorter-term and is interest-only with the funds released in tranches at stages of the build.

As an interest-only loan, the key is to have a strong exit strategy, which the lender will need to approve before they can make an offer. This is usually the sale of the property, or a remortgage once the development is complete.

What is the Difference Between Residential Development Financing?

In most cases, lenders will offer up to 75% of the cost of buying the plot of land, and usually 100% of the build cost. This is released in stages during the project.

Lenders will want to inspect the site and verify the stage that the build has reached before they release the next batch of funds. There is usually a fee payable for each site inspection.

Once the loan term has ended, the borrower needs to repay the debt in full. This happens via the exit strategy, which usually means the finished development is sold, or the project is refinanced through a longer-term mortgage.

How Can I Get the Most Competitive Rates on Residential Development Finance?

You will often find that residential development finance carries fairly steep interest rates - although interest is only charged on funds in use that have already been drawn down.

It is, therefore, essential to find the best deal possible to ensure that your residential development remains profitable.

Lenders tend to review each application on its own merit, but the best rates are offered if the following are in place:

  • Robust Exit Strategy: if you don't have a solid exit strategy in place to repay the original loan, you are likely to be turned down for lending. The better the strategy, the better the rates offered.
  • Good Deposit: typically you can borrow up to 75% of the cost of the land, and the full cost of the build, but the more extensive a deposit you have, or the better the security on offer against the lending, the lower the risk to the lender and the more favourable the terms.
  • Development Experience: if you have a long track record of profitable residential developments, you are likely to be offered better rates. However, even first-time developers can secure development finance with a strong exit strategy and by working with an expert broker.
  • Clean Credit History: while you can apply for development finance with bad credit, if you have a good credit score and clean credit file, you will be offered better rates.

If you meet all of the lender's eligibility criteria and present a low-risk lending prospect, you can achieve better rates and terms.

The best strategy is to work with an independent whole-of-market broker who can advise on the right lenders to apply to, and negotiate the most competitive rates on your behalf.

Is it Worth Using a Broker for Residential Development Finance?

Using a broker for residential development finance is critical. FCA permissions restrict the number of loan providers who can offer this type of product, so expert support is essential.

Often you will find terms such as maximum one-year loans, but by using a whole-of-market broker, you have access to the full spectrum of lenders and products.

Expert finance brokers such as the Revolution team deliver tailored advice, recommend the best options for you, and negotiate deals to ensure you get the right lending. Give the team a call for more information on 0330 304 3040.

How Does a Residential Land Development Loan Work?

Land development loans are the same product as development finance but consider land investments.

In some cases, you might want to invest in property, and build a new construction rather than developing the existing property. With this scenario, the lender will value the land without the property to gain an estimate of the worth of the project.

Is it Possible to Apply for Residential Development Finance in any Area?

It depends - you can find more straightforward development finance in England and Wales, with a higher number of lenders to choose from.

In Scotland, there are fewer lenders and restrictions on developments in protected areas and away from the mainland.

Northern Ireland developers face a similar scenario, with fewer appropriate lenders to choose between.

Those lenders in Scotland and Northern Ireland tend to offer higher rates of interest, and maximum caps on loan to value ratios they can offer. In these areas, expert broker support becomes even more crucial to find an affordable deal.

Are There Other Options Aside from Residential Development Finance?

There certainly are - some of the alternatives include:

  • Self-Build Mortgages: like a development loan, but specifically for residential developments. Interest rates are often lower than through development finance.
  • Equity Release: if you have other development properties, you can refinance an existing asset to release the funds required for a new development.
  • Bridging Loans: a short-term bridging loan is available quickly, and on an interest-only basis and typically releases the capital in one lump sum.

Our team of consultants can recommend multiple other lending options; the right one for you depends on your circumstances and borrowing needs, so give us a call for a chat about which routes are the best fit.

Professional Advice with Residential Development Finance

For more information and bespoke guidance about applying for residential development finance, contact Revolution Finance Brokers on 0330 304 3040 or email us on info@revolutionfinance.co.uk.

As an independent, whole-of-market broker, we ensure you apply to the right lenders, and have the most competitive development finance offers on the market.

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FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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