The Most Commonly Asked Questions Related to Development Finance
Development finance in London is a specialist financial instrument that is particularly used to construct, renovate, convert and repurpose properties. Development finance can be secured for both residential and commercial properties, but it is granted exclusively to experienced property developers or investors. Unlike other long-term mortgages, development finance is typically short-term that usually lasts for 18 to 24 months.
How does development finance work?
Unlike a traditional mortgage loan where the lender takes the value of the property into account, a development finance lender considers the value of the completed property. This is how development finance works:
• You submit an application that includes all the details of the development project plan, build cost and timeframe, professional fees and other supporting documents.
• The lender will assess your application and offer terms based on the details you provide.
• There will be a credit check on your current finances, experience, the feasibility of the development plan and your exit strategy.
• Once the loan is approved, the funds will be released in stages and the project will be monitored.
What paperwork and documents do I need to show for development finance?
Documents require in development finance depend on the extent and nature of the funding required. In general, most lenders will expect to see the following paperwork and documents as the bare minimum.
• The estimated final value of the completed property
• Construction and renovation costs
• A complete breakdown of the project schedule and timeline
• Track record of your extensive experience
• Successful past projects
• Full disclosure of professionals involved in the project
• Confirmation of receipt of the planning permission
• Document any restrictions that may apply
A specialist financial advisor will help you go through all the necessary paperwork that is required to be submitted along with the application.
How much can I borrow?
Most lenders in the UK allow you to borrow starting from £50,000, allowing borrowers to lend any amount depending on the value and scale of the development. The maximum loan amount for each project depends on the total loan costs, how much the development costs and how much the initial investment costs.
Generally, you will find that loans are capped at around 75% GDV, while some lenders also limit development loans to 90% of the total development costs.
What are the average interest rates?
Interest rates for development finance vary significantly based on the project, however, they may vary from 4% to 15% APR. Smaller loans may come with higher interest rates than larger loans since there isn’t an economy of scale available.
What fees and other costs are involved in the development finance?
The fee structure varies according to each application and the set of circumstances that surround the deal. However, as a borrower, you should expect the following fees:
• Lender arrangement fee – a fee charged by the lender for providing the funds.
• Broker arrangement fee – a fee charged by the broker who acts as an intermediary between the borrower and the lender.
• Legal fees – fees charged by the lawyer.
• Surveyor’s fees – a fee charged by the surveyor for overseeing the development to ensure it is in accordance with building regulations, and the project progresses as planned.
There may be some additional fees, such as management fees, non-utilisation fees and exit fees that may be charged depending on the lender you choose.
Can I qualify for development finance if I have bad credit?
It is technically possible to secure development finance with bad credit history, but you are less likely to qualify for the best deals from the lenders. Credit ratings demonstrate your ability to repay the loan on time. With bad credit scores, the lender may not offer favourable deals or there may be a strict application process.
If you are concerned about your credit rating, contact an experienced financial advisor who can help you prepare a solid application that increases your chances of approval.
Can I get development finance as a first-time developer?
Yes, you can get development if you are a first-time developer and have little or no experience. However, you should know that the choices of lenders may be reduced as not all lenders are inclined to fund a project of a first-time developer. But, if you team up with an experienced developer to co-manage your project, securing great deals on development finance is still possible.
Can I apply for development finance for any type of property build?
Development finance can be secured for most types of properties. This includes new buildings, residential and commercial properties, mixed-use properties, refurbishment projects, and regulated and unregulated development. It is essential to work with a professional broker who can help you find the right lender who is willing to offer development finance for your property type.
How long does a development finance application take?
The time to get your application approved depends on how quickly you submit the necessary documents, how soon the surveyor completes the evaluation and whether the lender has any more questions or concerns that need to be answered before they proceed with the application.
When do I have to repay the property development finance?
Different lenders have different terms for their development finance instruments. Usually, there are no interim payments until the project is complete. The interest is rolled up into the loan, and the total amount plus the interest is paid back after the development is completed. However, some lenders may ask for interim interest payments.
How do I repay the loan?
When you apply for development finance, the lender would want to know how you plan to repay the loan. Here are some standard options to repay the loan:
• Sale of the property after the development work is finished
• Refinance the property with a new, long-term loan
Who uses development finance?
Development is often used by experienced property developers, investors and construction companies who don’t have or are not willing to invest too much of their capital in their projects. By covering anything from 75% to 90% of the total project cost, developers have the opportunity to run several projects simultaneously. This would not have been possible if they choose to invest all of their capital in one project, making development finance ideal for them.
Is development finance right for me?
If you are looking for a short-term loan to help through your development project and you can provide all the documents required to access the development plan and you are confident that you will be able to repay the loan when the term ends, then the development finance might be the right option for you. At Bridging Finance 4U, we help you secure the right loan with the right paperwork at the right interest rates to make sure you succeed in your development project. Click to Blog