Everything You Need to Know About Development Finance

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Whether you are a first-time builder or an experienced property developer, the success of your development project begins with finding the right finance. If you are looking to undertake a building project involving residential, commercial or mix-use property, then development finance could be the best solution for you. In this guide, we will cover everything you need to know about development finance.

What is Property Development Finance?

Property development finance in London is a type of funding solution that is particularly useful for funding building projects. It is a short-term, interest-only loan that enables you to buy property, or land, renovate an existing property or construct a new building from scratch. Development finance is usually suitable for building residential, commercial or mixed-use properties.

What is the Lending Criteria for Development Finance?

There are several lending criteria that a lender will consider before granting your loan. These can vary significantly depending on your development project and the lender you choose, so the rules for what will and will not be accepted are not written in stone. However, it is still important to keep certain things in mind:

The amount you can borrow – The amount you can borrow will be decided by the lender based on the predicted value of your development project. Based on Gross Development Value (GDV), the maximum loan you can get is usually 55%, but this value may go up to 75% in some cases. Most lenders will offer £50,000 upwards.

The total loan term – Development finance term typically ranges from 6 to 18 months. The loan term may also vary depending on the size of the loan, but they usually don’t last longer than 18 months. There will be no penalties for repaying the loan earlier than expected.

Project viability – The lender would want to know the viability of the project you want to undertake. They may reject your application outright if they are not convinced of your development plan or if there are too many issues.

The experience of the property developer – Development finance lenders will also take the developer’s experience into account before granting the loan. If you prove that you have undertaken successful development projects earlier, then you have a good chance that the lender will approve your loan.

Your credit rating – Your development finance approval will mainly depend on the feasibility of the project itself, provided you have a good credit score. A Bad credit rating can reduce the chances of approval or losing competitive terms.

Your exit strategy – The lender would also want to know your plan of action, meaning how you plan to repay the loan. Whether it is selling after development or remortgaging the finished property, they would want to see proof of a solid exit strategy before granting the loan.

When Development Finance Can be Useful?

The scope and scale of the project can decide the type of finance options available to you. Development finance will usually cover about 75% of the construction cost, leaving a considerable amount of funding to be arranged from other sources. Development finance can be used for the following purposes:

Light refurbishment/renovation work – Relatively lighter work for the building, such as aesthetic upgrades, non-structural changes and retouching walls, floors and ceilings. Funding in this case is required for the short term and the loan is repaid when the property is sold or put on auction.

Heavy renovation work – It includes more extensive work than merely aesthetic upgrades to the property. This may include structural changes, such as building extensions, adding rooms and revamping walls. In this case, finance is needed for a little longer term.

Ground-up construction – Ground-up development involves everything from purchasing the land to completion. This requires major plans and a team of architects and builders, which becomes a more complex series of investments. In such cases, funds may be required for a few months or years.

What Do I Need to Know Before Applying for Development Finance?

• Experience in development finance is considered favourable by development finance lenders.
• A lender will ask to demonstrate a viable exit strategy.
• The interest rates may be higher than a traditional mortgage.
• Developers with bad credit ratings also have a chance for approval, but their choice of lenders will be restricted.
• Lenders may ask for a detailed plan on how you will undertake the project, how much it will cost and its estimated value after completion.
• Having planning permission will make it easier to access the development finance.

How Does Development Finance Work?

#1 Firstly, get a basic idea of how much your development will cost and what you would expect it to sell for.

#2 Get in touch with a specialist development finance advisor as he will help you determine estimated interest rates and fees, as well as provide a list of necessary documents and paperwork.

#3 If you decide to continue, they will work with you to complete the paperwork and submit your application.

#4 To the lenders that show their interest, they will schedule a meeting with the lender so that you can explain to them your development plans.

#5 A surveyor will visit the site to conduct a valuation of how much the project will cost and it’s worth after completion.

#6 After the survey is completed and all the parties have accepted the terms of the loan, it will allow the lender to officially begin the lending process.

#7 The initial funds towards the purchase of the site will be released to you with the remaining amount released in stages against the work completed.

Why Use the Help of a Development Finance Broker?

Often developers struggle to find a good lender that can offer a favourable deal. That is because they choose to do it on their own or seek advice from brokers who themselves have limited experience in offering advice on development finance matters. The wrong advice can cost you hundreds and thousands of pounds in interest and fees.

Using a specialist development finance broker can save you time and energy. They will be able to assess your plans, prepare your application and help you connect with thousands of suitable lenders. They can also help you understand the pros and cons of developing bridging finance in London and how you can best leverage this funding solution. Click to Blog