Taking on a property development project
Taking on a property development project is an exciting venture, but securing the proper financing is essential to making your vision a reality. Development finance refers to funding designed for property developers, accommodating the unique challenges of construction projects.
Unlike traditional mortgages, development finance is structured around development timelines, from land acquisition to construction completion.
What is development finance?
Development finance is a short-term commercial property loan intended for development purposes. It can be used either to finance just the development of an already owned asset, or to purchase land to develop on, and cover the project costs.
It’s often used by developers, investors and landlords looking to improve or increase their portfolios.
A development loan can be used on residential, commercial or mixed-use properties, but not usually for owner-occupier residential purchases. If you’re looking for funds to build your own home, you’ll need a self-build mortgage.
Regulation and lender credibility
Not all forms of Property Development Finance are regulated by the Financial Conduct Authority. However, this allows for greater flexibility in their lending. You need to ensure you’re always working with a reputable lender and Reliance Mortgages carries out due diligence on all lenders recommended.
Key features of development finance
- Flexibility: Development finance offers flexibility in terms of loan structures and repayment schedules. This is essential as it allows developers to adapt to the evolving needs of their projects.
- Staged funding: Rather than receiving the full loan amount upfront, developers typically receive funds in stages, aligned with project milestones. This ensures that funds are available when needed, minimising interest costs.
- Risk assessment: Lenders assess the viability of the development project, including factors such as location, market demand, and feasibility. This thorough evaluation helps both parties manage potential risks.
- Interest rates: Interest rates for development finance are often higher than standard mortgages due to the short-term nature of the loans and the increased risk associated with construction projects.
How do development loans work?
Development finance is typically borrowed over a period of 6–24 months to enable the completion of building projects prior to their refinance or sale.
The funds are drawn down in stages (known as tranches), and this works slightly differently depending on whether you’re buying land and/or property to develop or simply borrowing the actual development costs.
Interest is only charged on the funds that have been drawn down, meaning you won’t pay interest on the total loan value until you’re at the final stage of the project.
Lenders will instruct a Quantity Surveyor to ensure each stage of the build is on track before funding is released.
Loans are offered on an interest-only basis and will therefore require a solid exit strategy. This would typically be refinancing onto a buy-to-let mortgage for residential letting purposes or onto a commercial mortgage, but it’s also possible to use the resale of the developed property as a payment strategy.
Who benefits from development finance?
- First-Time Developers: Aspiring developers looking to break into the industry can access development finance to kickstart their projects and build their portfolios.
- Experienced Developers: Seasoned developers with a track record of successful projects can leverage their experience to secure favourable development finance terms.
- Commercial Ventures: Those seeking to create commercial properties like offices, retail spaces, or industrial complexes can find tailored development finance solutions.
Who is eligible for development finance?
The majority of lenders prefer borrowers to have property development experience, especially for major projects. However, there are some lenders willing to work with first-time developers and investors.
Lenders may also have preferred development niches, for example, some specialise in leisure facilities, whereas others may only be open to residential developments.
Reliance Mortgages will find the best lender for your situation. Interest rates vary wildly depending on the size and purpose of your loan, as well as your personal circumstances and experience, but the GDV (gross development value) will be the biggest key factor in a lender’s decision.
What costs are involved with arranging development finance?
- Deposit: Typically 25–40% if purchasing land or development site. For development costs, some lenders are willing to offer 100% LTV loans, but this will usually require a high-value asset as collateral.
- Arrangement fees: Between 1–2% of the loan value, but varies by lender and loan size.
- Exit fees: Fees of 1–2% may also be payable on some development loans.
- Legal fees: Both personal and the lender’s legal expenses are payable by the borrower.
- Valuation fees: Valuation will take place at each new stage of the development so multiple visits should be taken into consideration in line with your project scope.
- Drawdown fees: Multiple drawdown fees may also apply in addition to the valuation fees at each stage.
How much can you borrow with development finance?
Loans can be into the multiple millions of pounds, but won’t usually be less than £50,000. This is determined on a case-by-case basis, but some lenders have lower maximum loan sizes and offer a lower percentage of the GDV than others.
Most lenders will allow you to borrow up to 75% of the land or site value, as well as between 75–100% of the Gross Developed Value (GDV).
Keep in mind that you’ll need to produce a robust set of project plans with clear cash flow demonstrated at each stage of the build, and a contingency fund.
Most lenders offer better rates to low-risk developments, so a cautious approach to your borrowing will be rewarded.
Loan terms
- Loan size: £100k – £20m
- Length: 1–24 months
- Loan value: Up to 100% of the GDV may be available in some circumstances
- Rate types: Fixed or variable
- Acceptable exit strategies: Sale or refinance
- Acceptable security: Residential property, commercial property or land (1st or 2nd charge)
Why Reliance Mortgages?
Whether you’re an experienced developer or approaching development finance for the first time, Reliance Mortgages will help you source the right level of funding for your development niche.
Application process and considerations
Project Proposal: Developers present detailed project proposals, outlining the scope, costs, and potential returns. This helps lenders assess the viability of the project.
Exit Strategy: Lenders want assurance that the developer has a clear exit strategy, whether through property sales, refinancing, or other means, to repay the loan at the end of the term.
Collateral: Lenders typically require the development property as collateral. The property’s potential value upon completion is evaluated to determine the loan amount.
Development finance can be complex, even if you’ve used it before. Lenders tend to work in certain industry niches and offer hugely different loan sizes, interest rates and terms. Reliance Mortgages have excellent relationships with lenders built over many years in the industry.
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