Development loans, also known as bridging finance, are short term loans that can be utilised to build a new property or to develop existing properties, for a range of purposes including residential houses, commercial property or industrial buildings.
Development finance is a type of secured lending, typically available at values of £25,000 and above.
This type of financial product is available, depending on the circumstances of the applicant, even if they are a first-time developer, and the duration of development finance is often between 12 and 36 months.
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Usually, there are no early repayment charges applicable on development loans, and therefore this type of finance can be a flexible and cost-effective source of finance for developers or investors.
Should the finance be required for the initial purchase of the site or plot, the maximum amount that can be borrowed at this stage is usually between 50%-60% of the purchase price of the property.
Development finance for purchasing the site would usually include criteria that the site was already subject to suitable planning permissions required for the development.
In addition, developers can sometimes borrow up to 100% of the build costs, providing that the total amount is within 60-70% of the gross development value.
The lender would usually review build cost borrowing on a case by case basis and provide any additional terms as required. Funds are available to the developer in stages and interest is usually only charged on the funds that are drawn.
What are the Advantages of Development Finance?
The main benefit of development finance is that enables borrowers to have access to much larger levels of money than traditional borrowing methods.
Also, this type of finance is available on a range of properties that traditional mortgages would not be, such as unhabitable buildings.
As previously mentioned, the flexibility available with development finance is a major benefit to investors, both with the ability to plan and fund the project in stages, but also to provide a method of keeping the costs of borrowing as low as possible.
The costs are kept at a minimum as interest is only charged when monies are drawn but also as there are fewer repayment restrictions, enabling the finance to be repaid quickly.
Recommended reading: Guide to Bridging Loans Brokers.
What are the costs involved with Development Finance?
There are various fees applicable to development finance, however, these will vary between lenders. Typically, this type of finance will be subject to:
- Facility fees – Or otherwise known as arrangement fees are calculated as a percentage of the total value of the loan.
- Interest – Interest can be charged monthly or annually, however in comparison with standard mortgages, the interest rates are higher due to the short-term nature of the financial product.
- Exit fees – A fee payable on repayment of the loan is commonplace. This fee can be calculated in different ways, either as a percentage of the value of the monies borrowed, or the total value of the project.
- Broker fees – Broker fees can vary in amounts but also between different charging methods. Some brokers receive a commission from lenders on successful loan applications and therefore do not charge clients directly, however, others will set a fixed fee for their services.
Other costs will also need to be factored into a business plan including:
- Valuation fees – As with most property transactions, a valuation will be required and there will be charges for this. Where the valuation for a development differs, is that an assessment will be made, projecting the valuation of the completed development project.
- Legal fees – Any legal advice throughout the project as well as undertaking the legal transaction of property that has been developed will need to be paid for.
- Monitoring fees – Due to the nature of development finance, lenders will usually need to monitor the progress of the project. All costs attributed to monitoring are borne on the borrower.
- Transaction fees – Lenders will typically charge each time an instalment payment is paid to the developer throughout the project for both the administration and the banking fees.
What is the Application Process of Development Finance Loans?
Due to the specialised nature of development finance, brokers are often used to research the market, provide advice and compare lender offers.
Following this initial stage, an application would be submitted to the selected lender. An application for development finance would include details of;
- The applicant including their current financial circumstances.
- Details of other assets to be used security.
- A documented proposed exit strategy.
The lender would then review an application in its entirety and undertake the usual credit checks. If successful, an agreement in principle can be issued.
At this stage, further investigations are undertaken including a site visit to ensure project viability and an independent valuation of the project is forecast. Should the findings of these investigations be sufficient, a formal loan offer and terms can be issued.
Any legal elements would be taken care of next, followed by the completion of the loan and the first drawdown payment.
How is Development Finance Repaid?
Either at the end of the term of the loan or beforehand, if desired, the development loan would be repaid. Often repayment would involve one of the following;
- Sale of the property – Upon completion of the sale, the development loan would be settled in full.
- Refinance – There would be a range of refinancing options available to be considered at the end of the initial finance duration period, depending on; the circumstances of the borrower, the plans with the development property and the timeframe of such plans. For example, the developer may choose to rent out the property at this stage, and therefore a landlord type of finance may be sought for a longer term of borrowing.
Development Finance Summary
Development finance is a short-term, cost-effective and flexible type of loan suitable for a range of development projects. Such financial products are rarely found on the high street and therefore are usually accessed via a broker.
As with all secured borrowing, the property and security deposits are at risk should repayments not be made.
Give us a call on 01925 906 210 or get in touch for advice that is personal to you and takes your credit history into account. That way you will know where you stand in the development finance market and we can guide you on your route to securing a suitable loan.