Property Development Finance – UK Property Finance

By Kristian Derrick

Last Reviewed: 8th February 2024

If you are dreaming of developing a property but are overwhelmed with obtaining finance to make this happen, you have come to the right place!

You may already be a property developer needing to change direction with a next investment, or a budding new developer.

Either way, we can help guide you through the process of securing finance for development projects of any size.

What is Property Development Finance?

Property development loans are short term financial products that can be utilised to build a new property or to develop existing properties.

Such loans are a secured type of lending and can be obtained for a range of different development projects including residential houses, commercial property or industrial buildings.

Property development finance is an attractive method of borrowing due to the flexibility offered to the applicant and can also be a cost-effective way of funding development projects.

What is the Application Process of Development Finance Loans?

Due to the specialised nature of property development finance, the use of a broker is highly recommended to aid the application process. Brokers perform many services from assisting with the initial market research and comparing lenders to assisting with the application itself and liaising with the preferred lender throughout.

An application for property development finance requires gathering lots of information about:

  • The applicant themselves including their current financial circumstances.
  • Details of other assets to be used security.
  • Thorough details of the planned project.
  • A documented proposed exit strategy.

The lender would review an application in its entirety, sometimes requesting further information 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.

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What are the Advantages of Development Finance?

One of the main benefits of property development finance is that this type of borrowing can enable access to a higher level of finance than traditional borrowing methods.

Typically, should the borrowing be required for the initial purchase of the site or plot, the amount that can be borrowed at this stage is typically between 50%-60% of the purchase price of the property.

In addition, developers can usually also borrow up to 100% of the build costs, providing that the total amount is within 60-70% of the gross development value. However, as with most lending, the actual figures offered to an applicant may vary depending on the personal circumstances and details of the project itself.

Another huge benefit of property development finance is the flexibility offered, such as drawing down finances as needed throughout the project as well as having fewer restrictions when it comes to settling the loan.

These elements also ensure that borrowing costs are kept to a minimum as interest is only charged when monies are drawn, and monies are not borrowed for longer than needed.

What are the costs involved with Development Finance?

There are various costs applicable to borrowing via property 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. Although, as already discussed, the flexible way that interest is charged is likely to be cost-effective compared to other methods of borrowing.
  • Exit fees – A fee payable on repayment of the loan is common. 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 will often vary between companies.

It is always best to check the terms of lending upon receiving an offer to compare such fees. Again, a specialised broker will be best placed to assist with the comparison of offers between lenders, ensuring that the most favourable terms are selected.

Other project costs to be aware of when investigating developing property

All development projects will incur other costs that will need to be factored into a business plan needed for the application process. These will include;

  • Valuation fees – As with most property transactions, a valuation will be required and there will be charges for this.
  • Legal fees – The cost of any legal advice throughout the project as well as charges to undertake the legal transaction of the property will need to be considered.
  • 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 to be paid by 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.

How is property 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 property 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.

How much can you borrow with a bridging loan?

The exact amount you can borrow will depend on a variety of factors, one of the major considerations being the purpose of the loan.

For example, if you are borrowing against a residential property, it may be possible to borrow up to 80% of the property value. The lower the loan to value (LTV), the lower the interest rates, with some lenders offering interest rates at 50% LTV.

For non-residential properties, such as commercial properties and land, it may be possible to borrow up to 70% LTV.

This means that if the property is worth £100,000, the maximum you could borrow (including your existing mortgage) would be £70,000.

Choosing a Bridging Loan

Before researching the market to commence comparing various bridging loans, a few key facts will be required about the loan and properties that will be involved.

  • The ideal amount to be borrowed – Typically, lenders will offer bridging loans between £5,000 and £10 million.
  • The value of the owned property – The value of the currently owned property will impact how much that can be borrowed and the loan rates available.
  • The duration of time the loan is required – Best estimations are used to map out how long the additional funds are required for, for example, the timing of a housing purchase chain and the required legal process. As discussed above, the duration of the loan will define the type of loan needed.
  • The equity owned within the property – The level of equity and whether there is a mortgage currently on the property will affect how much additional funds can be borrowed.

Property Development Finance Summary

Property development finance can be a highly attractive form of short-term, cost effective borrowing due to the flexibility offered via the terms of the lending.

For most developments requiring finances of £25,000 and above, development finance may be the most suitable type of loan, however as with all large financial decisions through impartial financial advice should be obtained before committing.

In addition, as with all secured borrowing, the property and security deposits are at risk should repayments not be made.

The use of a specialised broker is highly recommended to ensure that the chosen financial product is the most competitive available and that all terms are fully understood.

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.

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