In short, property development finance is used for building, converting or renovating property to be sold or retained for investment. In other words, it is a form of financing which can be used to purchase land, build new developments and renovate existing ones.
For example, it can be used to convert a pub into a home or an office block into a set of flats.
Payments are usually released in stages, in line with the progression of the development. Once the development is complete, you can exit the property development loan and move this to longer-term finance or repay the loan by selling the development. This is known as an exit strategy.
Eligibility requirements for property development financing are more fluid than those for commercial or residential mortgages. Instead of satisfying broad requirements, lenders consider each unique case individually before determining how much they are willing to offer you for a loan.
This includes:
Consider a straightforward example where you are looking to refurbish a pub into a residential home before selling it to an investor. Since you already own the property, you are purely looking for the finance to renovate the house, and perhaps add other features such as a balcony.
Your lender will take into account the Gross Development Value (GDV) of your project, before deciding how much financing you can access. The GDV is a measure of how much your refurbished property will be worth once the development is finished, and therefore how much it could be sold for on the market.
Alternatively, consider the example where you wish to buy a plot of land and build a housing estate. In order to do this, you’ll need to consider the cost of the land and the money you’ll need to build the properties. This includes the cost of raw materials and labour. So, you decide to take out a property development financing loan which covers the cost of both the land and the construction. Most lenders will finance 100% of the development costs in such a project, leaving you to find a deposit or further funding for the purchase of the land.
In this example, you must also obtain a 10-year structural warranty approved by the Council of Mortgage Lenders, known as a New Home Warranty.
If property development financing isn't for you, consider other forms of lending. Start your search on our website today.
As previously mentioned, property development finance is determined on a case-by-case basis. This means lenders will often determine your rates depending on numerous factors, such as amount borrowed, GDV and the experience the borrower has in previous developments.
In addition, property development financing comes with fees every borrower should factor into their total cost. These include, but are not limited to:
Some of these fees are discussed in more detail in our guide.
This will generally be tailored to the borrower’s unique circumstances. Exit strategies are crucial when determining how property development financing will be paid, meaning it will likely influence the term of your loan.
If you need a bridging loan instead, speak to one of our preferred brokers.
The key difference between these two forms of financing is that property development financing is designed for users looking to build, refurbish or convert their property. Bridging loans, on the other hand, can be used for a variety of different purposes. To find out more about bridging loans, read our guide.
If you require further funding when building, converting or renovating property mezzanine finance can be a way to top up your funds. In some cases this can increase the overall funding to 90% of the total development costs, including site purchase.
As an alternative to property development financing, there is joint venture development financing. This method of financing funds 100% of your development plans, meaning you do not need to use any of your own capital. However, this can be difficult to obtain and, if granted, your joint venture partner will require a share of the profits. This can be as much as half of any money made.