Property development finance: The basics
Getting to grips with the fundamentals of development finance can make it much easier to find the right facility to fund your next project.
Here are the basics you need to know:
What is development finance?
Development finance is a specialist short-term financial product, issued to fund property construction, renovation and redevelopment projects. It is typically available exclusively to experienced developers and builders with an established track record.
A development finance loan will usually be issued over a period of three to 24 months, during which interest accrues on a monthly basis – often around 0.5% or less. Unlike a traditional loan or mortgage, the funds are released gradually in a series of stages as the project progresses.
What are the benefits of development finance?
Development finance has the potential to be a uniquely flexible and cost-effective facility – particularly when repaid promptly. Along with comparatively low borrowing costs, the funds needed can often be raised and accessed within just a few working days.
This makes development finance ideal for time-critical purchases and investment opportunities, when looking to beat competing bidders to the punch. In addition, all development finance products are unique, with bespoke terms and conditions to suit the exact requirements of the borrower.
When should I consider development finance?
Determining whether development finance is right for you means asking yourself the following questions:
- Do I have the right background? Development finance is usually only accessible by those with an established and provable background in projects similar to the project they are looking to finance.
- Do I have the paperwork in order? Presenting a detailed planning permit asset, liability, income, and expenditure (ALIAE) summary as part of your application is necessary, along with all additional evidence you can provide to support your case.
- Do I have a concrete exit strategy? This refers to your capacity to repay the loan in full and by the agreed deadline. Have you already lined up a buyer for the completed development, or are you still considering the available options?
- Do I have the on-hand capital to cover the rest? A development finance loan will typically be issued at a maximum of 75% or 85% LTV. This means that you will need to contribute to the remaining 25% or 15% yourself, or source it in the form of a second-charge development finance loan.
How can I get a good deal on a development finance loan?
The best way to get an unbeatable deal on a development finance loan is to enlist the support of an experienced broker.
Many of the UK’s most established development finance specialists offer their services exclusively via broker introductions. Elsewhere, others offer preferential terms, conditions and costs to customers who apply via approved brokers.
Your broker will help you build a clear picture of the options available, while providing the independent advice you need to make the right decision. After which, they will compare the market to find you an appropriate product and negotiate on your behalf to keep borrowing costs to the bare minimum.