Development Finance Explained
What exactly does the term development finance relate to?
So does development finance relate to improving residential property to sell at a profit, as seen in television programmes?
What sort of interest rate would be used on the funding?
How long can I borrow for?
At what stage of the development process do I need to consider the finance?
Development Finance guidelines:
What exactly does the term development finance relate to?
It's basically funding to build both commercial and residential property or to carry out large scale renovations to existing property.
So does development finance relate to improving residential property to sell at a profit, as seen in television property programmes?
As a general rule of thumb no. The sort of work you tend to see on television programmes is small scale and would be carried out using a refurbishment loan.
The first thing to consider with development finance is actually the type of funding you're looking for or need. There is a difference between refurbishment loans and development finance. A refurbishment loan would be taken out if a property was in a shabby state and needed some basic internal work carried out whilst development finance would be used for a fairly serious building project or some major additions / building works to an existing property.
As a benchmark development finance loan sizes would tend to be from £150,000 upwards.
Refurbishment loans can be obtained with some Buy to Let mortgages and cover basic residential property renovations.
Some mortgage lenders will allow you to borrow on the enhanced property value after the property has been improved, and not on the property price in its current condition, this allows you to borrow more. You in essence receive two loans, the first loan on the current property value and the second loan once the works are completed. You will need to provide the valuer with a detail of the works you are carrying out, they will then assess these once they are carried out to confirm the new property value. The Buy to Let mortgage route only applies if you plan to keep the property as a rented investment after works are completed.
What sort of interest rate would be used on the funding?
Each development finance deal will be individually priced, so unlike a commercial mortgage there are no set rates. The lender will look at what you propose to do, assess the property and works, then as a result bespoke price the loan accordingly.
Residential development finance rates differ dependent on the applicant's experience, the property type and the nature of the proposal but a good benchmark to consider would be Bank Base Rate + 1.5% to 2.5%.
Finance is usually arranged on an interest only basis and the term of the loan can be one year plus depending on the size and nature of the underlying project.
Loan to project costs will be influenced by projected gross development values but funding would typically be in the region of 70% to 75% of the property purchase price and build costs.
It is important to consider the ability to re-gear finance against enhanced value at the project end, therefore vastly increasing funding potential. It is possible to organise a loan to finance up to 100% of the property development costs where the borrower already owns the land on an unencumbered basis or for experienced developers with a strong track record.
In short you will be borrowing against the end value of the property rather than its current value.
At what stage of the development process do I need to consider the finance?
Development funding without full planning consent is extremely difficult to secure, unless you are a highly experienced and have completed a number of development projects. Before seeking finance it is essential to finalise planning consents and have all relevant documentation available to show your lender.
