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UK Development Finance Explained
Development finance comes in many guises. In essence, this type of borrowing is used to fund the building or significant refurbishment of property - from conversions to complete renovations.
Most development finance loans are short-term and last only until the building project is complete. Still, terms can vary significantly from a few months to several years on larger commercial development projects.
Property development loans are repaid when the build has finished, typically by selling the finished property or refinancing through a longer-term mortgage. This exit strategy is a vital part of the development finance application process.
The mortgage advisors team is an independent, whole-of-market broker negotiating competitive development finance for projects across the UK. For impartial advice, give us a call on 0330 304 3040 or email the team at [email protected].
How Do I Know if I am Eligible for Property Development Finance?
There are many different types of lenders and development finance products, so if you're planning a development, there are likely property development loans for you.
Specialist lenders deal in niche property development finance applications, including:
- Unusual or complex developments.
- New property developers.
- Applicants without a deposit.
The critical factor is to ensure that your development will return a profit, the property development finance costs are realistic and that you have a viable way to pay back the loan.
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Why do Developers Choose Property Development Finance?
Property development finance offers multiple benefits that make it appealing to property developers
Development borrowing is usually the most beneficial option and more accessible for new-build developments or a property requiring significant renovations.
- You can develop larger-scale projects, with usually only 10% of the costs required as a deposit. Developers, therefore, don't need to release other capital to raise deposit finance. They also have the benefit of diversifying with different types of property to reduce their risk.
- More streamlined cash flow management. You do not need to tie up all of your savings on one property development with a lower deposit requirement. That means less financial risk.
Investment returns are higher by investing less capital initially through a deposit against property development loans. The below table illustrates how this works:
The developer is building twelve residential properties, and the land costs £1 million. The houses will cost £1.8 million to construct and are expected to sell at £4.6 million in total.
Land purchase cost
Total development costs
Gross development value (GDV)
If the developer wants to borrow through property development loans both to finance the land investment, and to cover the development work, they might be able to secure 70% of the cost of the land, and 100% of the value of the build.
Day one valuation (what they need to borrow upfront)
70% borrowing available against the day-one value
Total borrowing against development costs
Total property development finance loan value
Overall, the developer is borrowing nearly 90% of the cost of the build.
The total cost of the development
90% loan against the project
Maximum loan value offered
The lender will release £700,000 initially, towards the land purchase. The rest of the property development finance is released in stages as the build progresses.
Lenders will calculate the total loan, against the GDV value - i.e. what the properties will be worth when they are finished and sold.
- GDV value is £4,600,000
- Loan value is £2,500,000
- Loan to GDV ratio is therefore 54.3%
How Much Do Property Development Finance Lenders Charge?
Property development finance includes several different types of fees:
- Interest charges start at 4.5% but are typically more like 6.5% to 9%. The rates aren't the only consideration and sometimes higher interest, but with lower fees elsewhere can prove more affordable.
- Arrangement fees on property development loans are usually around 1% to 3% of the total loan value and are generally repayable at the end of the loan term.
- Broker ffees are the charges from the broker to negotiate the lending you need. These are usually 1-2% depending on the complexity of the loan and what type of finance you're applying for.
- Exit fees are typical in in property development finance and are usually calculated as a percentage of the total borrowed or the GDV.
- Non-utilisation fees are additional charges sometimes raised against the facility's balance that you haven't yet drawn down.
- Valuation fees are required for an accredited surveyor to value the site. This process usually happens at the beginning and end of the development and various stages if a different independent valuation is required.
- Monitoring surveyor costs. Many lenders offering property development loans will appoint their own monitoring surveyor to oversee the development and provide independent progress reports.
- Legal fees are required when you complete the legal aspects of the lending paperwork.
- Drawdown fees are levied each time you withdraw a new tranche of funds from the loan facility.
The issue with fees against property development loans is that, while the total cost might be small, they can quickly add up and significantly affect the entire project costs.
When Do I Need to Repay a Property Development Finance Loan?
In most cases, property development loans become repayable once the project has finished. Usually, that is by selling the property or refinancing.
Another option is development exit finance, which is lower interest than development finance, and a short-term solution to give you more time to realise your exit strategy.
Most development finance loans are repaid by:
- Selling the properties. The proceeds are used to repay the lender, and the balance is kept as profit.
- Refinancing. You can use development exit finance to finance the project while a sale is pending or to take over at the final stages.
- Remortgaging. Another option is to take out a buy to let, commercial or residential mortgage to repay the loan.
Who is Eligible for Property Development Finance?
Pretty much any property developer can apply for property development loans. The Revolution Brokers team works with:
- Private developers
- Partnerships and LLCs
- Businesses both domestic and overseas
- Special Purpose Vehicles Companies
Can I Apply for Property Development Finance Without any Experience?
You certainly can. Most mainstream lenders will require a minimum level of experience, but niche providers are happy to work with first-time property developers.
In this case, working with experienced contractors, brokers, and architects can make a big difference.
Do I Need Planning Permission to Get Property Development Finance?
It isn't mandatory, but many lenders will only offer an agreement in principle in advance of granting planning permission.
Can I Apply for Property Development Finance with Adverse Credit?
Yes, you can - Revolution Brokers can advise on specialist lenders who are flexible in bad credit scenarios and how to present a profitable application.
We work with developers with adverse credit history issues ranging from missed payments and defaults to more severe problems such as CCJs and bankruptcies.
How Much Can I Borrow Through Property Development Finance?
Lenders offering property development loans will assess each application on its own merit and consider the following factors when deciding the maximum they can offer to lend:
- ·The day one advance required - the amount you need upfront so the development can begin. This value is typically restricted to 65% or 70% of the value of the property.
- ·Loan to cost ratio - how much you want to borrow, as a proportion of the total development cost. Maximums are often around 80-90%.
- ·The loan to GDV ratio - how much you'd like to borrow, as a proportion of the anticipated property value once the development is complete. This maximum is usually somewhere around 60% to 70%.
When Does the Interest on Property Development Finance Get Paid Back?
You won't usually expect to make regular payments against property development loans, as the interest is rolled up into the loan and becomes repayable with the original balance at the end of the term.
In some cases, lenders will ask for regular payments against property development loans, and others may permit voluntary payments if you have the cash available and would like to reduce the final liability.
How is Funding released in Property Development Finance?
Lenders will agree on the key stages of the build with you at the outset. This agreement depends on how the works are scheduled and what the costs will be at each stage.
Can I Get Property Development Finance for a Partially Constructed Development?
This scenario can be more complex, with many lenders reluctant to get involved with partially finished constructions. The risk is higher since they don't have any oversight of the works already completed, nor can they control the quality.
In some cases, you can find a development finance lender to take over a project from another financier, which is usually more straightforward since monitoring surveyor reports will be available.
However, it is possible to finance a partially built site; contact the Revolution team on 0330 304 3040 for further information.
What are the Most Important Factors to Consider Before Applying for Property Development Finance?
There are lots of factors to think about when comparing property development loans:
- ·Costs. You'll need to know all the costs and how they impact your expected final profit margin.
- ·Site inspections. Lenders will visit the site and carry out checks before work begins and at regular stages throughout the build.
- ·Accurate information. Applications must include all necessary information, including costs, plans, experience levels and planning permission.
What are the Differences Between a Bridging Loan and Property Development Finance?
Applications for property development loans must include all necessary information, including costs, plans, experience levels and planning permission.
The biggest deciding factor is whether the project requires significant renovation works, usually impacting at least 30% of the property floor space, or whether it is a minor conversion that might be better financed through a bridging loan.
When in the Planning Stage is Best to Apply for Property Development Finance?
It's usually wise to wait until you have planning permission before applying. Should you not yet have permission, you can apply for provisional planning in the interim or wait until this has been granted.
Applications for property development loans can take time to review, so leave as much time as you can for the process to take place.
Most applications take around six weeks to complete. If you need fast development finance or are planning a longer-term project, give the Revolution team a call on 0330 304 3040, or drop us an email at [email protected] to arrange a good time to talk.
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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.