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Development Finance for Residential Properties

Can you use development finance for a residential renovation project? This guide explains the best ways to finance residential property developments.

Almas Uddin
Almas Uddin

Founder and Mortgage Advisor

Almas Uddin2024-07-17
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Development Finance for Residential Properties

Residential development finance is a popular lending option for developers and property investors - and may also be the most beneficial alternative to a mortgage if you've bought a home that requires substantial renovation!

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.

We hope this information is helpful and assists you in understanding your mortgage options and whether residential development finance is the best product for your property project.

For more help and support, contact the Revolution Brokers team on 0330 304 3040 or drop us a message at [email protected].

What Does Residential Developer Finance Mean?

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

That could be for a home you already own or might be a mortgage product to help purchase an investment project and finance the costs of bringing it into good repair.

This type of home loan runs over a shorter term and is interest-only with the funds released in tranches at stages of the build, so it requires a mortgage when the work is finished, which will mean a reduction in interest costs.

As an interest-only loan, the key is to have a strong exit strategy, which the lender will need to approve before making an offer.

This strategy is usually the sale of the property or a remortgage once the development is complete. Knowing your exit strategy is critical and something you'll need to include in your residential development finance application.

Lenders need to know you have a viable plan to repay the short-term finance, so this is a critical part of the assessment process.

  • Loan details
  • help If the land was purchased within the last 2 years for less than the current land value, we will lend up to 65% of this figure
  • Initial Loan (day 1) must be less than 65% of Initial Land Value (day 1)
  • help Minimum 6 months
  • The LTGDV is higher than 70%. Please review the Initial Loan (day 1), construction costs and gross development value fields.
Instant Results
Initial Loan (day 1) 0
Total Loan Amount 0
Day 1 (LTV) 0
Margins at 0
Build Term (months) 0
Minimum Term (months) 0
Assumed arrangement fee @2% 0
Admin fee 0
Exit fee 0
Net Day 1 Advance (after deductions)* 0
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What is the Difference Between Residential Development Financing and Commercial Development Finance?

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.

The financing is released in stages during the project, which is pre-agreed during the application evaluation.

Lenders will want to inspect the site and verify the build's stage before they release the next batch of funds. There is usually a fee payable for each site inspection, which you'll need to cover as the borrower and complete before your funds are available.

Once the loan term has ended, the borrower needs to repay the debt in full.

This repayment happens via the exit strategy, which means the finished development is sold or the project is refinanced through a longer-term mortgage.

Suppose you're not yet sure whether you intend to sell or keep the developed project. In that case, it's crucial to make these decisions before applying for financing since it's a fundamental part of the lender's decision-making.

How Can I Get the Most Competitive Rates on Residential Developer 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 plan, the better the rates offered.
  • Good Deposit: Typically you can borrow up to 75% of the cost of the land and the total 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 will likely be offered better rates. However, even first-time developers can secure development finance with a strong exit strategy by working with an expert broker.
  • Clean Credit History: While you can apply for development finance with bad credit, you will be offered better rates if you have a good credit score and a clean credit file.

If you meet 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 suitable lenders to apply to and negotiate the most competitive rates on your behalf.

Is it Worth Using a Broker for Development Exit Finance?

Using a broker for residential development finance is critical. FCA permissions restrict the number of loan providers who can offer this 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 Housing 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.

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

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 Development Finance Residential?

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 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.

OOur 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

FFor more information and bespoke guidance about applying for residential development finance, contact mortgage brokers on 0330 304 3040 or email us at [email protected].

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.

Almas Uddin
Almas Uddin

Founder and Mortgage Advisor

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FCA disclaimer

The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature.

We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.

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