When you embark on a property development project, profit is king. You need to know what the land or property will cost, how much budget the development requires, and what you will sell it for.
Another crucial factor is the cost of the development finance - because expensive fees and steep interest charges can eat into your profit margin, or even render a construction project unviable.
Revolution Brokers works with a vast network of specialist development finance lenders. We work with every client to understand your project, recommend the best borrowing routes, and negotiate competitive rates that you won't find on the open market.
Here we'll explain what sort of fees to expect, how to budget for development finance costs, and what the typical rates are. If you're looking for attractive development finance for any UK projects, give us a call on 0330 304 3040, or drop an email to firstname.lastname@example.org.
What Sort of Size Development Finance Loan Can I Get?
Property development is a broad and diverse market; from anything such as a residential home conversion, through to a large-scale construction development of multiple new properties.
Most lenders have a minimum of £50,000, and there isn't any limit on how much you can borrow. Sizeable commercial development finance can go up to millions of pounds.
Development finance isn't intended to be a long-term loan like a mortgage - although it's similar in that it is secured against the property. However, it is meant to be a short-term loan that you use to cover the costs of a construction or development and then be paid back once the work completes.
In most cases, the developer either sells the property and pays back the loan from the profits or refinances on a cheaper, longer-term mortgage product.
Most development finance loans have a maximum term. That can be anything from 18 months to four years, so it's vital to know how long the work will take, and apply to the right lender.
What are the Average Interest Rates Charged on UK Development Finance?
Again, the rates will be significantly different depending on what size of loan you're looking for, and how long the development will take.
Lenders will look at the gross development value (GDV) as a primary factor in determining what sort of rates they will offer.
As a rough indication:
- A smaller development loan of less than £500,000 will cost more in terms of interest. You’ll pay anything from 6.5% a year and above.
- Medium-sized development loans over £500,000 will be slightly cheaper, given the economies of scale (a smaller loan takes just as much administrative work, with lower returns, hence the higher interest rates). Usually, you can borrow around 70% of the GDV and will pay between 4.5% to 9%.
- Higher risk development finance can cost much more - standards we're seeing are from 0.85% to 1.35% per month - which works out as between 10.2% and 16.2% a year.
Those lowest rates of around 7% are only usually available for experienced property developers borrowing large values over a million pounds.
What Fees are Payable on Development Finance Borrowing?
It isn't just the interest rates you'll need to budget for in development finance. Lenders will also charge various fees, which are essential to consider.
- Arrangement fees, or facility fees, are charged for the cost of setting up the borrowing facility. You'll usually pay a percentage of the loan value, often around 1% or 2%.
- Broker fees are payable for the service of brokering your loan and negotiating the terms. Depending on the project, lender, and borrowing product, this is sometimes payable directly, and sometimes through the lender. The UK average is around 1%.
- Exit fees are only incurred in a typical mortgage scenario if you decide to repay the loan earlier than in the terms. However, many development finance lenders charge this as standard, as an additional fee at the end of the loan term. Exit fees can be another 1-2% of the loan value, paid alongside the final balance.
- Professional fees are payable to solicitors, architects and surveyors.
- Valuation fees are mandatory since a lender will undoubtedly need an independent valuation before they make an offer to lend. In many scenarios, a development project will be valued multiple times, at various stages of the build.
What Figures are Involved in Applying for Development Finance?
Like all home loans, a lender will need to look at various figures and calculations before they can make an offer.
The preliminary calculations used in development finance include:
This means the value of the borrowing, compared to the total cost of the development work. Usually, the loan is anything from 80% to 100% of the development costs.
For example, if you're building property at the cost of £500,000 and are offered a 90% LTC ratio, you can borrow £450,000 towards the costs.
The 'day one' figure means the amount you will be borrowing right from the outset - the amount of the loan you need upfront to get the development work started. There is usually a limit on the day one position of around 65% or 70%, and you'd be able to borrow this large a proportion of the facility only if you have adequate security in place.
The gross development value is how much the project is expected to be worth once it's finished. Another metric is the 'loan to GDV' figure - which means how much you're borrowing compared to the eventual value of the finished development.
In some cases, you'll have a maximum loan to GDV percentage. In joint venture development finance, that limit is set at 80%.
What Criteria do Development Finance Lenders Consider?
Every lender will consider their own policies and lending criteria before making a development finance offer.
The above calculations and figures are the core calculations, but a lender will also have other criteria in place.
- Cash flow planning can be significant, as a lender will need to understand the stages of the build, and how you're going to manage the budget in line with the tranches of funding as they become available.
- The day one value is also crucial since a lender will be reluctant to release a large amount of the loan at the start of the project, without any evidence that the development is going to plan.
- Surveys will usually take place before, during, and after the development. A satisfactory survey will be mandatory before you take out a loan, and adequate surveys may be required before further tranches are released.
- Most lenders will also require a solid business plan, and to see that you've accurately budgeted for all the costs and fees present in any property development project.
In many cases, a developer will build in a contingency fund, which is a proportion of the total facilities set to one side should the project need an emergency cash injection, suffer an unforeseen delay, or have an unexpected increase in costs.
Independent Advice on UK Development Finance
For more advice and support with budgeting for the costs of development finance, get in touch with the Revolution Brokers team.
As an independent, whole-of-market broker, we work with clients large and small to streamline their development finance application and ensure we only ever apply to the best-placed lenders.
Give us a ring on 0330 304 3040 or email the team at email@example.com.