What is property development finance?
It is a category of business financing products used to fund residential, commercial, or mixed-use property development projects. There are many types of property development finance, including mortgages, short and long-term loans, bridging finance, and refurbishment loans. There are many types of property development finance, including mortgages, short and long-term loans, bridging finance, and refurbishment loans. Development finance can be used to upgrade or expand existing buildings, change the purpose of existing buildings, or build new developments from the ground up. So, the type of project and the need behind your loan will influence the property development finance you will need to fund your project.
Private property development finance
As suggested in the name, private property development finance is a solution for private individuals and businesses. As a personal or business entity, it allows you to invest in private residential property without having to raise the capital or financing out of your own pocket. As always, the lending criteria is based on your or your business’s financial security differ and will differ from lender to lender. Some lenders may also require more detailed information, such as a business plan and investment strategy, as well as your assets and credit score.
A broker can assist you in building a strong case to present to lenders. With the right experience and network access, your mortgage broker can connect you with the lenders most likely to support your case application and offer competitive, flexible financing.
First-time property development finance
If you or your business is investing in a property development project for the first time, getting access to competitive and affordable financing can be challenging. Firstly, it can be hard to know what type of financing option is best for your project and financial circumstances. For example, a short-term refurbishment project may suit a bridging loan rather than a refurbishment loan; a more extensive renovation may be better suited to a commercial mortgage; a ground-up property development would require more comprehensive financing for the land and construction costs. Secondly, first-time property developers are considered a higher risk by lenders than those with a good, established track record.
It’s also important to remember that the higher you measure on the lender’s risk profile, the higher the interest rate that they are likely to apply to the loan, and the higher the deposit requirements is likely to be. A good rule of thumb to estimate how much you can borrow as a first-time property developer is your deposit will likely be between 25-40% of the build cost, with the finance solution covering the remainder. Getting the right finance solution is where a broker becomes an invaluable resource. Not only in terms of explaining your options and determining what type of financing is suitable but motivating and negotiating with lenders to give your case the most exposure possible and access the most competitive deals.
Types of building development loans
Property development finance can take many forms, including:
Development exit funding
Development projects can easily run over budget at the end of the build due to unforeseen circumstances. Development exit financing allows you to settle the project budget overruns, even if there are delays in finalising sales or other cash flow issues.
Short-term bridging finance
Bridging loans help to smooth cash flow for developers, make rapid financing available to secure new properties and opportunities, and allow developers to purchase properties that don’t qualify for traditional financing.
Conversion finance
This refurbishment financing allows developers to transform properties, from converting office or industrial space into flats to reconfiguring residential properties into office space.
Refurbishment finance
This type of financing is for developers who want to invest in necessary or aesthetic property upgrades and renovations for existing commercial or residential properties to drive rental yield and buyer appeal.
Development refinancing
When working on a tight development project, running behind schedule can incur penalties on existing financing solutions. Flexible development refinancing can extend your borrowing term, reduce the costs of financing your project, and release exit financing for the next project.
Second charge financing
This allows you to secure funding using a commercial or residential property in your or your business’s name that already has a mortgage against it. Because this is a second mortgage, the first mortgage will take priority in payments. As such, the second mortgage will take longer to clear than the first and will incur interest during its duration.
Can I get a loan for property development?
The short answer is yes! If you are interested in investing in commercial or residential property development to grow your business, start generating additional income from your property, or develop your property portfolio, property development financing can help make these goals affordable.
What is the key lending criteria?
Of course, lending criteria differ from lender to lender, but eligibility factors typically include:
The project
Essentially, the lender will look at what you are planning to use the funds for, whether to secure a property at auction, refurbish your commercial property, or invest in residential property development. whether it’s to secure a property at auction, refurbish your commercial property, or invest in a residential property development. Some lenders specialise in certain areas of property development, and others have risk profiles for different types of projects.
LTV
The lender will apply their own risk profile to develop your Loan to Value ratio. Your LTV will influence the loan's interest rates, with high LTV clients receiving more favourable terms.
Type of loan
The type of financing you apply for needs to match the scope and goals of the property development project to get a favourable response from lenders. For example, a short-term bridging loan will likely be looked on unfavourably if you want it to fund the majority of a ground-up, large-scale development, but favourably to secure a property at auction.
Strategy
If you are applying for property development financing on a larger scale, your lender may want to examine your business strategy. This review will help determine the risks associated with the loan for the lender and ensure that they are in line with the terms they are willing to provide.
Deposit and financial position
The higher the deposit you can supply and the stronger your financial position, the better your LTV and the lower your risk as an investor. Lenders will be encouraged by this to supply more generous terms and rates to support the project.
Benefits of using mortgage broker services
Applying for property development finance is a complex process that involves multiple financing solutions and differing lender criteria for an extensive range of projects. Negotiating this process and ensuring that your case has premium exposure to interested lenders is challenging and time-consuming unless you have an experienced professional broker at your side.
From small projects to large-scale multi-million-pound developments, our broker team handles every client with professionalism and expertise. We will develop your proposal, put it in front of the right lenders, and ensure that you get the best finance for your property development project. Talk to our team today for flexible, fast property development financing.
