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If you’re wondering how to raise capital for a property development project, it’s worth considering development finance. Proper Finance can help builders and developers find the best deals on development finance. We compare a variety of leading UK lenders, offering a range of different loan types to meet the unique needs of our customers.
Development finance is a loan that is used to fund the development or refurbishment of a property. It can be used on commercial, residential or mixed-use properties, and helps to turn these projects into a reality.
This type of loan is only used for a short/medium-term period of time. It is also a secured loan, that uses the borrower’s valuable assets, such as the land or property, as collateral.
With development finance, the lender not only takes into account the value of the secured asset, but also the plan for the building project, and will make their decision on whether to lend based off of these key features. It’s worth noting that these are not the only qualities of an application a lender will make their decision off of.
Success in an application for development finance will also depend upon how credit-worthy you are, which is based upon your credit score, your history with past borrowing, as well as other aspects of your financial history.
Development finance works by securing a valuable asset (e.g. the property/land for the project) onto the loan. This asset will be used as collateral if the borrower cannot make repayments. It’s therefore vital to ensure that you are stable enough to keep up with repayments, as failure to do so can end in losing the project altogether.
This type of loan will usually require a considerable amount of paperwork, as the lender has to assess the future success and value of the project once finished. Those applying for development finance will typically have to provide the following documents for an application:
Development finance lenders are experienced in these types of building projects, and will conduct rigorous checks before deciding whether to lend. The amount a provider will lend also depends on how strong the plans for the project are. Therefore, it’s important to make sure you have a solid, well thought out plan to ensure you get access to the amount of finance you require.
Developers and builders will take out development finance in order to fund a building project. As previously mentioned, this project can be for a variety of different builds, including residential, commercial, or a mix of the two.
Lenders will typically fund a certain percentage of the project through this loan, whether that’s for the actual purchase of the property, or the subsequent development that takes place on it – used to pay for things like building materials or contractors involved on the project.
The exact amount that you will be able to borrow with property development finance will depend on a number of factors. First of all, it depends on the lender.
The loan amount will also be calculated on gross development value (known as GDV) as well as what the property is estimated to be worth once renovations have been carried out. Some lenders Proper Finance works with can offer a 60% maximum loan to GDV, rising to 75% in terms of maximum total costs.
As a rule of thumb, development finance lenders can help cover all the build costs incurred and a percentage of land costs.
For example, a developer may have planning permission to build two houses estimated at £5 million (gross development value). The overall costs are £3 million, calculated as £1.5 million for building costs and the rest for purchasing the land.
In this scenario, one of our lenders may agree to fund £3.75 million of this amount (capped to 75% of costs) with an initial £400,000 advance given, and then the rest of the balance is granted in stages through the build. Source: Magnet Capital
In the majority of cases, funds are not sent in one lump sum when it comes to property development finance but rather sent in stages according to quantity surveyor and architect certifications.
Unless a formal offer letter has been given to you, you will not have to pay any costs. If you accept the offer, there will be a ‘commitment fee’ that is around 2% of the total amount you have borrowed.
Depending on the circumstances, there may also be a small broker fee too, averaging at 2%. You may also need to take into consideration fees by your own surveyor and solicitor too when it comes to evaluating the property.
When it comes to interest rates, lenders will start at 6.5% per year, and the exact amount depends on the GDV, security and other factors. You have the option of paying the loan and interest back each month, or ‘roll up’ the accrued interest so you can make payments in full once the project has been completed and sold.
In the latter case, the interest is compounded so it would be slightly higher in interest rate costs than if you decided to pay on a monthly basis, which is something to bear in mind.
As with all types of finance, the eligibility criteria will depend upon the lender, the loan, and details of the application. It is highly unlikely that you will be able to access development finance if you have a bad credit rating. These types of loans will typically have a strict application process, requiring applicants to show they are capable of paying back the loan through a good credit score as well as other credit-worthy credentials.
Proper Finance can help you compare a range of different deals on development finance. about your plans for development.
We may be able to provide you approval in principle which can take as little as 24 hours. In terms of what we can provide finance for, this includes the following:
Apply for development finance with Proper Finance today! We look forward to helping realise your property development dreams.