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UK Development Finance Explained

UK Development Finance Explained

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Development finance comes in many guises. In essence, this type of borrow is used to fund the building or significant refurbishment of property - from conversions to full renovations.

Most development finance loans are short-term and last only until the building project is complete.

When the build has finished, the loan is repaid, typically by selling the finished property or refinancing through a longer-term mortgage.

The Revolution Brokers team is an independent, whole-of-market broker, negotiating competitive development finance for projects all across the UK. For impartial advice give us a call on 0330 304 3040 or email the team at info@revolutionbrokers.co.uk.

How Do I Know if I am Eligible for Property Development Finance?

There are lots of different types of lenders and development finance products, so if you're planning a development, there is likely a loan for you.

Specialist lenders deal in niche applications, including:

  • Unusual or complex developments.
  • New property developers.
  • Applicants without a deposit.

The critical factor is to ensure that your development is going to return a profit, the costs are realistic and that you have a viable way to pay back the loan.

Why do Developers Choose Property Development Finance?

This type of finance offers multiple benefits that make it appealing to property developers:

  1. 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.
  2. More streamlined cash flow management. With a lower deposit requirement, you do not need to tie up all of your savings on one property development. That means less financial risk.
  3. Investment returns are higher by investing less capital initially through a deposit. 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

£1,000,000

Total development costs

£1,800,000

Gross development value (GDV)

£4,600,000

If the developer wants to borrow 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)

£1,000,000

70% borrowing available against the day-one value

£700,000

Total borrowing against development costs

£1,800,000

Total development finance loan value

£2,500,000

Overall, the developer is borrowing nearly 90% of the cost of the build.

The total cost of the development

£2,800,000

90% loan against the project

£2,520,000

Maximum loan value offered

£2,500,000

The lender will release £700,000 initially, towards the land purchase. The rest of the loan 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 does Development Finance Cost?

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 are usually around 1% to 3% of the total loan value and are generally repayable at the end of the loan term.
  • Broker fees 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 development finance and usually calculated as a percentage of the total borrowed, or the GDV.
  • Non-utilisation fees are additional charges sometimes raised against the balance of the facility that you haven't yet drawn down.
  • Valuation fees are required for an accredited surveyor to value the site. This usually happens at the beginning and end of the development, and also at various stages throughout if a further independent valuation is required.
  • Monitoring surveyor costs. Many lenders will appoint their own monitoring surveyor to maintain oversight of the development, and provide them with 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 is that, while the total cost might be small, they can quickly add up and make a significant difference to the entire project costs.

When Do I Need to Repay a Development Finance Loan?

In most cases, the loan becomes 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. Development exit finance can be used to finance the project while a sale is pending, or taking 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 Development Finance?

Pretty much any property developer can apply for financing. The Revolution Brokers team works with:

  • Private developers
  • Partnerships and LLCs
  • Businesses both domestic and overseas
  • Special Purpose Vehicles Companies

Can I Apply for 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 Development Finance?

It isn't mandatory no, but many lenders will only offer an agreement in principle in advance of planning permission being granted.

Can I Apply for Development Finance with Adverse Credit?

Yes, you can - Revolution Brokers can advise on specialist lenders who are flexible in bad credit scenarios, as well as 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 Development Finance?

Lenders 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 Development Finance Get Paid Back?

You won't usually expect to make regular payments, 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, 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 Development Finance?

Lenders will agree on the key stages of the build with you at the outset. This depends on how the works are scheduled, and what the costs will be at each stage.

Can I Get 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 Development Finance?

There are lots of factors to think about:

  • ·Costs. You'll need to know all of the costs, and how they impact your expected final profit margin.
  • ·Site inspections. Lenders will wish to visit the site and carry out checks before work behinds, and at regular stages throughout the build.
  • ·Accurate information. Applications must include all of the necessary information, including costs, plans, experience levels and planning permission.

What are the Differences Between a Bridging Loan and Property Development Finance?

Both types of lending products have similarities, and it can be challenging to decide which option is most affordable.

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 Development Finance?

It's usually wise to wait until you have planning permission before applying. Should you not yet have permission, you can opt for planning gain finance in the interim.

Applications 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 info@revolutionbrokers.co.uk to arrange a good time to talk.

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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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