Property Development Finance

What is property development finance?

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

This type of business finance differs from a typical, residential 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 the size of the loan they’re willing to offer. This is usually expressed as the loan-to-Gross Development Value (or LTGDV).

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 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’.

What is an exit strategy in property development finance?

An exit strategy is a plan for repaying your loan once the term ends; this could involve selling the property or seeking a form of longer-term financing.

Property development financing for refurbishment

Refurbishment refers to converting or renovating an existing property. This can range from making aesthetic changes, such as installing a new kitchen, to transforming a previously commercial property into flats or other residence, 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.

They may also factor in the type of work being carried out when setting the interest rate; financing heavy refurbishment (that costs more than 15% of the property’s value, involves structural changes and/or requires planning permission), for instance, can be more expensive than financing light refurbishments.

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 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 some lenders finance 100% of 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 obtaining this warranty, contact a commercial broker.

What interest rates and fees can I expect?

When it comes to property development finance, UK lenders often determine the interest rate on a case-by-case basis and will consider factors such as the amount you’re looking to borrow, the project’s 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 it take to secure development finance?

The amount of time it takes to secure development finance depends on the complexity of your project and the thoroughness of your application but can range anywhere from a few weeks to months.

It’s good practice to have financing in place well before construction on your property commences.

How long does the loan last?

Property development finance is generally considered to be a form of short-term borrowing, with loans typically lasting between 12 and 24 months.

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

Property development finance risks

Property development finance isn’t without risks; fluctuations in the market can impact the price of raw materials and it’s not uncommon for projects to cost more than expected. That’s why it’s often recommended you set aside a contingency fund to cover any unexpected outgoings.

A poorly managed project also risks affecting your chance of securing property development finance again in the future.

Mitigate risks: Speak to a property finance expert today

Navigating property development financing options is incredibly complex, and this is reason enough to seek advice from a specialist commercial mortgage broker. Not only do they have the suitable knowledge of the sector, but a broker will also have contacts which can help you find the best deal, giving you access to options you may not be able to find on your own.

When dealing with a broker, you’ll need to be fully co-operative as they’ll be making a case to lenders on your behalf. Be vigilant and look for brokers who are members of the National Association of Commercial Finance Brokers (NACFB). As the professional body of the industry, they’ll have the necessary professional indemnity insurance and are required to follow a code of practice, ensuring thorough and professional service.