You may need development finance if you are planning a construction or renovation project. Similarly, you will have to explore property development financing options if you don’t have any cash.
As an investor, you may be eligible for various loans and mortgages. As a result of the complex nature of the industry, having a strategy is essential. Furthermore, you need to be aware of a few major rules and regulations by the Financial Conduct Authority.
Using this guide, you’ll learn about the different property development options, how to secure financing, and where to find expert assistance.
What Is Development Finance?
In many ways, it’s similar to bridging loans, except that it’s paid back in stages rather than in a lump sum. Development finance is commonly used by developers, landlords, and investors because it is flexible enough for residential, commercial, or mixed-use properties.
The right finance partner can often mean the difference between profit and loss regarding property development, including commercial and residential renovations.
You can use this option to solve cash flow problems and obtain extra funding for purchasing land or construction.
How Does Development Finance Work?
As your property development project progresses, you are paid out funds in drawdown stages known as ‘tranche drawdowns’, which allow you to borrow on a short-term basis. A self-build mortgage usually requires periodic re-inspections of the site before each payment is made.
To ensure you stay on track with your schedule of work (SOW), you will need to prove a viable exit strategy – how you intend to repay the debt at the end of the loan term. The property will usually be refinanced or sold once the development project is complete.
Although development finance has similarities with residential bridging loans, the ability to provide much larger sums is a major advantage. Particularly for those looking to purchase land or embark on a large construction project. Although development finance can be used for site purchases and construction costs, different terms and rules can apply to each.
Eligibility Criteria For Development Finance?
You will be eligible for development finance depending on your circumstances and the type of property development you are planning. Here are some major considerations lenders consider, along with typical deposit and loan-to-value (LTV) requirements.
Initial Deposit: The deposit size and resulting LTV for development finance will first depend on whether you need funding for the site purchase and the construction. If that is the case, most lenders will want a deposit of 25% to 40% of the site value. So, your LTV would be in the region of 60% to 75% for the land. Then, some lenders (but not all) will offer up to 100% LTV development finance for the actual construction and development costs. To do this, you have to use another high-value asset as security for the loan. Or sometimes, agree to a profit-sharing finance arrangement.
Exit Strategy: Lenders will want a solid exit strategy to get financing. Since you’ll only be paying interest on the development finance, lenders will want a clear plan for repaying it. It is essential to have a solid exit strategy, such as the ability to sell or remortgage the property.
Experience In Development: Typically, obtaining finance will be easier if you have experience with property development projects in the past. If you are a first-time developer, a few lenders will be willing to finance your project based on your proven track record, showing lenders that you are serious and that their investment is safe.
Interest And Loan Terms: A lender may allow you to choose between a fixed or variable rate, but others won’t. In addition, even though this is a short-term loan, property development can take time, so term lengths can be between 3 and 36 months. Choosing a lender that matches your specific property development needs is crucial based on your interest rate and loan length.
Type Of Development: Various development finance companies specialize in specific areas, such as hotels, first-time developers, overseas projects, or small property development loans. If you want your development project to get off the ground with the right type of development finance, it’s crucial that you speak with the right lender from day one.
How To Get Development Finance?
Below are some universal steps to set up the best possible development finance lending arrangement for your situation.
- Before applying for a loan, you should gather all your documents, such as proof of income, photo ID, bank statements and credit report. You may also need to provide some information about your development finance.
- Find the right lender or speak to a broker to find a lender that meets all your needs.
- Make an application and provide all the information. Some lenders, such as bridging loan providers, accept your loan applications and provide quick access to funds.
You must try to meet the eligibility criteria to improve your chances of approval.
Development finance is a loan commonly used by developers, landlords, and investors for construction or renovation projects. It is similar to a bridging loan but can be paid back in stages rather than in a lump sum and used for residential, commercial, or mixed-use properties. Development finance usually comes with flexible terms and can help solve cash flow problems or provide extra funding for purchasing land or construction.
The loan is typically paid out in drawdown stages, known as “tranche drawdowns,” which requires a viable exit strategy, such as the ability to sell or remortgage the property, to be in place. Eligibility criteria for development finance can vary depending on the lender and include the initial deposit, exit strategy, experience in development, and interest and loan terms.