Property Development Finance

What is property development finance?

Property development finance (also shortened to ‘development finance’) is a type of secured business loan which can be used to renovate, convert or build a property.

This type of business finance differs from a traditional mortgage which uses an existing property to secure the debt. Instead, a development finance lender will take into consideration the potential value of a project when deciding how much to loan.

While most development finance is unregulated, you’ll need regulated development finance if you’re building a property that you, as the borrower, intend to live in. This applies when 40% or more of the property is to be used as a primary residence.

Otherwise, if you’re developing a property either to sell or rent out, you may want to consult a commercial broker who specialises in this field.  

How can I access property development finance?

Eligibility requirements for development financing are a little more fluid than those for either a commercial or residential mortgage. Rather than satisfying broad requirements, a lender will consider each case on an individual basis before determining how much they are willing to offer as a loan.

Some of the factors which are considered include:

• Whether you, or your team, have demonstrable experience of completing a build to the correct standard
• Whether the property can be sold after development
• Whether the property is correctly valued pre- and post-development to mitigate any future problems.

After an amount has been decided, payments are usually released in stages that fall in line with how the development is progressing.

Once the build, renovation or conversion is complete, you can exit the loan through what is known as an ‘exit strategy’. This involves either moving the loan to a longer-term financing option or repaying the loan by selling the development.

Property development financing for refurbishment

Refurbishment applies to when you are either converting or renovating an existing property. This can range from making aesthetic changes, such as adding a new kitchen, to transforming a previously commercial property into flats or a hotel, for example.

In this instance, your lender will consider the Gross Development Value (GDV) of the project before deciding how much they’ll lend. This is a measure of what your development will be worth once completed and therefore how much it could sell for.

Ground-up development financing

Alternatively, if you’re looking to buy a piece of land and build a new property on it, this is sometimes known as ‘ground-up development’.

In this scenario, development finance can be used both to purchase the plot of the land and to cover construction costs.

Again, the GDV of the project is influential when it comes to lenders deciding how much they’re willing to finance. While most will finance 100% of the development costs, you may need a deposit to secure further funding or to put towards the purchase of the land.

You may also need to get a 10-year structural warranty approved by UK Finance, known as New Home Warranty. For help to obtain this warranty, consider contacting a commercial broker.

What interest rates and fees can I expect?

As previously mentioned, property development finance is determined on a case-by-case basis. This means lenders will often determine your rate depending on a number of factors, such as amount borrowed, GDV and your experience with previous developments.

Additionally, development finance comes with fees every borrower will need to factor into their total costs. These include, but are not limited to:

• Arrangement fees
• Exit fees
• Administration fees
• Surveyor fees
• Legal fees

How long does the loan last?

The length of the loan will generally be tailored to the borrower’s unique circumstances. Exit strategies are crucial when determining how property development financing will be paid and, as a result, will likely influence the term of your loan.

Other business financing options

If property development financing isn't right for you, there are other forms of lending you can consider. Start your search on our website today.