Who is Construction Finance Aimed At?
Construction finance is a type of development finance, offered on a short-term basis to fund construction projects.
Most applicants secure around 70-75% of the development value, to finance the initial investment or land purchase, with a 100% loan against the total budget for the build.
Loans usually run for around a year, although terms are negotiable depending on your expected completion date. Construction finance is interest-only lending, and you'll need to demonstrate your exit strategy to show your lender how you will repay the debt at the end of the term.
Development finance differs from bridging finance in that funds are released in tranches, at agreed stages of the project. The lender often requires a site visit at each stage, which can carry an additional cost.
However, the benefit is that you only pay interest on the funds you have already drawn down.
Can I Use Construction Finance for a New Home Build?
Financing new residential builds is a common reason for applying for construction finance. However, the most appealing form of lending depends on your experience in residential builds, and which sort of loan is the most cost-effective option.
Development finance is a popular option since it offers up to 75% of the funds you need to purchase the land, and usually the full value required for the construction itself.
However, residential projects are more challenging to finance, since this form of loan is often unregulated and therefore may be more restrictive in terms of caps and maximum loan terms.
If you are seeking construction finance for a residential build, give the Revolution team a call on 0330 304 3040, and we will run through the options available to you.
You might be better off opting for a self-build mortgage, but this all depends on the circumstances and how much you need to borrow.
Self-Build Mortgages with Construction Finance
Self-build mortgages are similar to development finance in that the lender releases money in stages, according to an agreed schedule of work.
Usually, the final payments are made when the property is watertight, and when decorating is completed.
It is worth considering the options since interest rates on self-build mortgages are usually higher than standard residential loans, in line with the increased risk level to the lender.
You will usually find that lenders require at least a 25% deposit, and sometimes as high as 50% if you have an adverse credit history or have no prior experience of construction.
For more help analysing the lending options, contact the Revolution team.
Understanding Commercial Construction Lending
All sorts of developers and private investors use development finance to fund commercial builds. These include the following sectors and projects:
- Agricultural investments.
- Care home construction.
- Educational establishments.
- Industrial complexes.
- Leisure facilities
- Professional developments.
- Retail sites.
- Semi-commercial properties.
Each construction finance application is assessed on its individual merit, and the most important factors are:
- What exit strategy you can offer and how stable this is.
- How viable the project is, and the expectation that this will be profitable.
- Whether you have construction experience.
- What deposit or alternative security is available.
- Your credit rating and credit history.
In most cases, you can borrow up to 70-75% of the cost of the land, and 100% of the build budget. This is released in stages as the build progresses.
Most borrowers plan to either sell the development on completion or remortgage when the work has finished to repay the development finance.
Lenders will also review the area of the build as part of the viability analysis. For example, if you are building a residential development in an area that is sought-after and has high housing demand, the viability will be rated as higher.