A numbers game

A numbers game

David Whittaker is managing director at Mortgages for Business

Finding a property ripe for development is relatively easy.  Finding and securing the best source of finance to maximise your return can be much harder.  A good deal will see your profit margin increase; a bad one can see it vanish.

Development finance can come in many shapes and sizes and the first job is to decide exactly what is best suited to your property’s need.  A refurbishment loan may be suitable if the property is a little shabby and needs just basic internal and cosmetic work.  Development finance, on the other hand, should be considered when fairly serious building work is needed.

Refurbishment loan
Refurbishment loans can be obtained alongside some buy-to-let mortgages allowing you to cover basic renovations. 

Some mortgage lenders will allow you to borrow on the predicted value of the property once the renovations are complete rather than on the current condition of the property, allowing you to borrow more.  In such cases you will effectively receive two loans; the first on the current property value and the second based on the value of the property once complete.  It will be necessary to provide the valuer with detail of the works you intend to carry out.  Works will also be assessed once completed to confirm the new property value.

Refurbishment loans attached to a buy-to-let mortgage are only available if you plan to keep the property as a rented investment once work is completed.  You can typically expect rates of around 6.7% on a refurbishment loan attached to a buy-to-let mortgage (based on the Paragon’s Freedom Tracker at LIBOR +2% exclusively available from Mortgages for Business).

It is still possible to get a refurbishment loan if you plan to sell the property after completing the work.  Lenders will typically lend up to 70% of the cost of the work leaving you to find the remaining 30%.  Interest rates on such loans are very similar to those on regular personal loans, many investors often choosing the personal loan route.

You could alternatively use a bridging loan to fund the refurbishment but be warned, these tend to be fairly highly priced, with typical interest rates of 1.15% per month, and add to your redevelopment costs. 

Development finance
Each development finance loan will be individually priced, so unlike residential mortgages there are no set rates.  The lender will be looking at what you propose to do, assess the property and works before creating a bespoke loan rate.

Residential development finance rates will differ dependent on your experience, type of property and the nature of the proposed development.  A good benchmark figure to consider would be Bank Base Rate plus 1.5% to 2.5%.

Finance is usually arranged on an interest only basis with the term of the loan being one year or more depending on the size and nature of the development project.

Lenders will typically lend in the region of 70% to 75% of the property purchase price and building costs, leaving you to finance the difference.

It is important to plan in advance the ability to re-arrange, or re-gear finance against the enhanced value of the property at the end of the development as this will vastly increase your funding potential for your next project.

It is possible to organise a loan to finance up to 100% of the development costs if you already own the land on an unencumbered basis or if you have a strong, demonstrable track record.

Development funding without full planning consent is extremely difficult to secure unless you are highly experienced with a number of completed developments under your belt.  Before seeking finance it is essential to finalise planning consents and have all documentation to show to your lender.

Putting the right finance in place on your development project will not only help increase your profit margins, it will mark you out as a professional developer making it easier to secure better rates on future projects.

David Whittaker is managing director at Mortgages for Business, a specialist buy-to-let and development finance brokerage.