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The Simple Guide to Development Finance Terminology

The Simple Guide to Development Finance Terminology

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As with all specialist types of mortgage lending, development finance has various terms and jargon that might not be familiar!

Here, the Revolution Finance team explains the most commonly used terminology to help you navigate the development finance marketplace.

For further assistance with your mortgage requirements, give us a call on 0330 304 3040, or drop a message to info@revolutionbrokers.co.uk.

Development Finance Term:

Explanation:

Building Regs

This term is an abbreviation of 'building regulations'. It means the rules that work must follow, and the standards it must meet, to be considered safe.

 

A building regs inspector usually needs to visit the development and assess the work to verify that it has reached the minimum safety standards.

 

Drawdown

A drawdown means the amount of cash that you have drawn from the entire borrowing facility offered to you.

 

In development finance, you usually draw down funds in stages, according to how far along towards completion the development is.

 

The final drawdown is usually paid out after the project is finished.

 

Facility Fees

Facility fees are the charges levied by a development finance lender - they're also sometimes called arrangement fees.

 

Most banks will charge a facility fee when the loan is paid back, and these are either a fixed charge or a percentage of the total borrowed.

 

GDV - Gross Development Value

Lenders need to assess the anticipated value of the development project to secure borrowing against it.

 

GDV is the calculation that estimates the value of the development when all work is complete.

 

The figure will take into consideration the existing market, and will predict a sale value as an open transaction.

 

LTC - Loan to Cost

We often talk about Loan to Value (LTV) ratios in mortgage lending, but in development finance, you'll also hear the phrase Loan to Cost (LTC).

 

That means how much lending your mortgage provider is offering, in relation to the overall cost of the development project.

 

LTC usually determines how much of the total facility the lender will allow you to draw down at each stage - i.e. what proportion of the total cost has been spent so far.

 

Monitoring Surveyor

Depending on the size of the development, your finance lender may wish to appoint its own surveyor to monitor the build.

 

This gives a mortgage provider the assurance that risks are being mitigated, and the project is progressing as expected.

 

Monitoring surveyors will monitor the work, but also ensure that budgets are being adhered to, the expected timescale isn’t slipping, and help with the verification process for the next tranche of cash to be drawn down.

 

Net Loan

The net loan is the total amount of the development finance mortgage that you can draw down.

 

It differs from the gross loan value because the lender will deduct fees and interest charges before arriving at the net amount of cash available.

 

Outline Planning Permission

If you hear this term, it means an initial planning permission application, which is a lot less detailed than a full planning permission application.

 

Outline applications are submitted to get an indication as to whether the local authority is likely to consider granting full permission.

 

If an outline planning permission application is approved, the developer can then start work on the finer details. They can also work to address any 'reserved matters' that require a specific and separate application.

 

PD - Permitted Development

PD applies in various scenarios, where the development works fall within a specific set of rules that make it exempt from a full planning permission application.

 

PG - Personal Guarantee

A PG is a guarantee given by an individual as additional security against a form of borrowing.

 

Usually, this exists where a company takes out lending, and a director provides a personal guarantee. This means that, if the company were to default on the loan, the director could be pursued through their personal assets to repay the loan.

 

Planning Gain

This phrase relates to how much a site increases in value when planning permission is granted.

 

Generally, full planning permission can add as much as 30% to the predicted sale value of a development.

 

Second charge

Like a PG, a second charge is a form of security that reduces the risk exposure of the finance lender.

 

Second charges are a form of security held over an asset - in this case, a property - in addition to a first charge, usually an existing mortgage.

 

If a property were repossessed and sold, the first charge holder would be repaid first, and the second charge holder from the remaining profits.

 

Tranches

A tranche isn't a word exclusive to the property lending market - but is rarely used elsewhere!

 

It means a 'chunk' - so in this case, you draw down tranches of funds at pre-agreed stages of the project.

 

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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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