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Property Development Finance: Essential FAQs

Written by Jimmy Rustling

In today’s post, we take a look at some of the most commonly asked questions on the subject of property development finance loans in the UK:

What Is Property Development Finance?

Property development finance is used by construction companies and developers to fund all types of projects. From new-build properties to renovations to conversions and more, development finance can be used for almost any legal purpose.

It is a strictly short-term facility, which can be arranged within a few working days, with repayment terms of 1 to 24 months. The funds are released to the developer in a series of stages, tied with the completion of major project phases.

Interest accrues at a rate of around 0.5% per month, and the full loan balance (plus borrowing costs) is repaid in a single lump-sum payment on a predetermined date.

What Types of Projects and Properties is Development Finance Useful for?

Funds raised by way of a development finance loan must be used for property development or construction purposes. However, there are almost no limitations as to how the funds can be applied within this specific field.

Just a few of the ways project and property types of development finance can be used include the following:

  • Commercial developments
  • Residential developments
  • Purchasing land
  • Covering construction costs
  • Property conversions
  • Auction property purchases
  • Development bridging
  • Mezzanine bridging
  • Pre-planning bridging
  • Mixed-use developments
  • Property refurbishments
  • Part completed projects

As the funds can be organised within a few working days, development finance is particularly useful in time-critical situations, where prompt action is called for.

How Much Does Property Development Finance Cost?

The monthly interest payable on property development finance average is around 0.5%, equating to an APR of 6%. However, interest rates and overall borrowing costs differ significantly from one product and lender to the next – anything from 4% APR right up to 9% APR.

Along with interest, additional costs include broker fees, arrangement fees, administration fees, completion fees and (in some instances) early exit fees. All such costs are negotiable, and can be minimised (if not eliminated entirely) with the help and support of an experienced broker.

How Much Can I Borrow with Development Finance?

Most development finance specialists cap their maximum loan values at around 80% LTV. This means you can borrow up to 80% of the project’s total development costs, and will need to come up with the remaining 20% by other means.

However, many development finance companies also offer ‘mezzanine’ finance products. This enables the borrower to take out a second-charge loan against the development, in order to raise the additional funds needed to cover 100% of all project costs.

Both loans can sometimes be arranged with the same provider to minimise borrowing costs, though may also be arranged with two separate providers where necessary.

Is Planning Permission Required to Get Development Finance?

Not necessarily, but it is much easier to qualify for development finance and or get a competitive deal, if you have already obtained planning permission.

Loans are issued by lenders on the basis of the assumed ‘risk level’ of the project. If planning permission has been granted and the project can go ahead, development finance is easier to secure. If there are any potential questions regarding planning permission or permits of any kind, a lender may be reluctant to fund the project.

Is Development Finance Available for Partially Constructed Projects?

Yes, but it can be more difficult to arrange than with a more conventional property development project. Lenders typically see partially constructed projects as higher-risk, due to the fact that they have had no say or inclusion in the work that has been completed to date.

The quality and viability of the project will determine its eligibility or otherwise, calling for a detailed and convincing pitch when submitting your application for funding.

Can I Qualify for Development Finance as a First-Time Developer?

It depends entirely on whom you approach with your application. Some development finance specialists work exclusively with experienced developers, who can provide extensive evidence of a successful track record in the sector.

Elsewhere, others are more flexible and accommodating when it comes to first-time developers. Again, it is the quality and viability of the project you pitch that will determine the outcome. If you can convince a lender that your project is a safe bet, they will most likely make you an offer.

If not, there are various alternative options to development finance to consider.

What Other Options Are Available for Funding Development Projects?

Where development finance is unavailable or unsuitable for your requirements, each of the following could be used to fund your project:

  • Buy-to-Let Mortgages – Ideal for anyone looking to purchase a property with the goal of letting it out to generate income through regular rental payments.
  • Commercial Mortgages – Can be used to fund the purchase of almost any type of commercial property, and works in a similar way to a conventional mortgage.
  • Bridging Loans – Similar to development finance (quick to arrange, strictly short-term etc.), but offered in a single lump-sum payment (not instalments), and not restricted exclusively to experienced developers.
  • Bespoke Secured Loans – Personalised agreements reached between specialist lenders and borrowers, secured against assets of value such as residential properties, business premises, vehicles, business equipment and so on.
  • Auction Finance – A specialist facility issued to cover the costs of purchasing properties at auction, and funding all subsequent repairs and renovations to the property.

The pros and cons of each of the above options will be disclosed by your broker, during your initial consultation.

Can I Get Property Development Finance with Poor Credit?

Yes, but only if you target the right lenders with your applications. Some development finance specialists welcome ‘subprime’ applicants, basing their decisions on the broader merit and viability of the projects they are presented with. Elsewhere, others immediately decline requests from subprime applicants.

If you have any questions or concerns regarding your credit status, ensure they are raised with your broker ahead of time.

For more information on any of the above or to discuss your requirements in more detail, contact a member of the team at UK Property Finance today.


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About the author

Jimmy Rustling

Born at an early age, Jimmy Rustling has found solace and comfort knowing that his humble actions have made this multiverse a better place for every man, woman and child ever known to exist. Dr. Jimmy Rustling has won many awards for excellence in writing including fourteen Peabody awards and a handful of Pulitzer Prizes. When Jimmies are not being Rustled the kind Dr. enjoys being an amazing husband to his beautiful, soulmate; Anastasia, a Russian mail order bride of almost 2 months. Dr. Rustling also spends 12-15 hours each day teaching their adopted 8-year-old Syrian refugee daughter how to read and write.