What is Development Finance?
Development finance is a short-term funding option designed to assist with the purchase and build costs of a residential or commercial development project.
Why Choose Development Finance?
Development finance can help to fund the often large outlay required at the start of a development project.
How it Works
Development finance typically offers terms between 12-24 months, with the finance being drawn down in stages as your project progresses.
Development Finance at a Glance
Individuals and property developers with relevant experience, a viable project along with detailed plans and a full breakdown of costs.
£100,000 - £25m +
12 - 36 Months
From 0.50% per month
Up to 75% Loan to GDV (Gross Domestic Value)
First legal charge over the land or property being developed.
Typically, 4-6 weeks.
Rolled up or serviced options available.
What is Development Finance?
Development finance is designed to assist developers and individuals with raising finance for the purchase of land along with 100% of the build costs associated with a construction project.
Development loans are short term loans used to fund a project from start to finish during the build phase. Once the project has been completed, the loan will typically be repaid through the sale of the property, or by refinancing. Development finance may be for a single or multiple property development, or to convert or renovate existing property. It can be for residential houses, commercial properties such as shops, offices or industrial sites, for multiple occupancy buildings, or even mixed use.
Who Can Apply for Development Finance?
Lenders typically prefer to work with an experienced developer, however if you are looking to finance your first project, and provided you have an experienced team of professionals behind the project, they may still be willing and able to assist. A development project team would consist of, but not be limited to, building contractors, architects, surveyors, and project managers.
Lenders will typically finance up to 70% of the purchase of the land or building, and up to 100% of the build costs. As the finance is secured against the property, if you have additional security available this can help secure a higher amount of borrowing, along with reducing the interest rate due to the perceived lower risk to the lender.
A big factor in the lender’s decision process is the Gross Development Value (GDV) of the project. This is the value of the development post construction and will denote the profit to be made, and again may impact the amount you can borrow and the available options.
Why Choose Development Finance?
Development Finance can assist an individual or developer in funding the often large outlay of a development project that is required at the front end. Whether that be for a single home, or for a large development of multiple homes being built on a plot of land from the ground up.
Using development finance is a good alternative to using personal funds and allows you to take on larger projects. It also allows you to put less of your own money into a project meaning you can use your money elsewhere as other opportunities arise. It also gives comfort that the cash for the project is pre-arranged. Knowing that the funds are guaranteed can help to speed the project up.
Finally, by financing a development in this way it can also be a good way of increasing your return on investment as you are able to put less into the project while only reducing the total profits by a small amount which will equal a far greater return per £ that you have invested into the project.
Key Benefits of Development Finance
- Access large sums of finance low initial investment
- Take on larger projects than you would be able to otherwise
- Cover up to 100% of the build cost
- Increase your ROI by not giving away profit/equity to 3rd party investors
- Only pay interest on completion of the project and when the loan is being exited
How Does Development Finance Work?
Development finance typically offers terms of between 12-24 months with the finance being paid in stages as per your plans or appraisal. Obtaining approval is heavily based around the GDV of the development in question, along with the experience of the borrower or the team of experts they will be using for the project and build.
The maximum borrowing amount is typically based on several factors:
- The land purchase cost – which the lender will advance at the start for the project to enable the build to commence. Purchase contribution towards the land is usually around 65-70% of the property value.
- The build cost – lenders typically finance 100% of this cost.
- Loan to GDV value – with most lenders going to 60-70% of this which is the maximum loan based on the final project value.
Funds are released in stages that will be agreed between the developer and the lender based on the schedule of the works to be undertaken and the cost. Typically, at each stage the development will be assessed by a Quantity Surveyor (QS) to ensure the money is being spent where agreed and that the project is on track for the completion date – and within budget.
A further key consideration for a development loan is also the exit plan on completion of the build. This could be typically sale of the property/properties, or a re-mortgage, for example on a buy-to-let, if you intend on keeping them in a portfolio.
Most development lenders offer a development exit which is a 12 month bridging loan on completion of the development to give the developer more time to sell the property. This type of bridge often carries a lower rate than standard bridging loans.
Finally, the site in question will require planning permission to be in place before paying out, although the finance can be agreed in principle subject to this, to avoid any hold ups.
Typically, the application process will take between 4-6 weeks for completion.
To discuss if your project could qualify for development finance, please get in touch with our in-house team of property finance specialists today.
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