What are the Benefits of a Property Development Finance Loan?
There are several reasons a property development finance loan might be the optimal borrowing for your conversion or build project:
- Many lenders will accept early repayments without charging a penalty.
- Inexperienced or first-time developers are eligible to apply provided they can provide contract details with a building contractor.
- Loan values start from £25,000 and above.
- Staged payments are aligned with critical points in the development, and interest is only charged on the amount of the facility drawdown to date.
- Other properties or assets can be used as security against the loan.
- If the development goes above or below the planned budget, there is no requirement to borrow the total amount agreed.
One of the few downsides is that the valuation will often take longer, given the unique nature of a development project.
Rates are also dependent on the nature of the property and your experience in similar constructions or renovations.
However, while you'll usually pay higher interest rates on development finance, it's usually the best option for renovations or build projects that wouldn't be eligible for a standard mortgage product.
You also only pay interest on the funding you have drawn down, making it viable to finance the work and then remortgage once the construction is complete.
Property development finance is a great way to secure the borrowing you need if the development site isn't eligible for other kinds of lending - for example, a derelict building that isn't a habitable property.
You can borrow as much as you need to, usually up to 100% of the construction costs .
What Does Property Developer Finance Cost?
Any borrowing product will have associated charges, and it's essential you know the total costs before signing an agreement. Some of the most common fee structures include:
- Arrangement fees or facility fees, usually calculated as a fixed percentage of the total loan value.
- Interest - charged monthly or annually. Typical rates tend to be around 7% per annum, with monthly charges of 1%. The longer the term, the lower the interest rate but overall larger the interest cost.
- Exit fees are not always payable but can be charged as a completion fee, generally calculated as a percentage of the finished development's value.
- Brokers fees - many lending products roll up broker charges into the loan agreement to avoid needing to make additional one-off remittances.
If you're interested in property development finance and would like to compare the fees applicable on the most competitive lending products, please give the Revolution team a call at 0330 304 3040.
Other related costs to set up a property development finance agreement are:
- Valuation costs through an independent surveyor to identify the security value before the lender makes a formal offer and again when the project finishes.
- Legal charges if required.
- Monitoring fees, payable for inspection visits at critical stages of the build.
- Drawdown fees - usually charged each time you access a new tranche of funding.
How Easy is it to Apply to Property Finance Lenders?
This type of borrowing is tailored to each client but tends to follow the same process:
- Contact Revolution Brokers to discuss your borrowing needs and the details of the project.
- Our team analyses the market to identify the most appealing deals available.
- The lender issues an agreement in principle and then organises a site visit.
- Once the visit is complete, the valuation is prepared to confirm the property’s value.
- Provided this covers the loan value, the lender makes a formal offer to lend.
- At this stage, any legal work can proceed.
- Next, the first payment is drawn, and this continues at stages throughout the development.
Once the project is finished, it will be revalued, and the property sold or refinanced to raise the capital to repay the loan.
How Do Repayments Work on Property Developer Finance?
Most property development finance loans accumulate monthly interest - hence it is preferable to repay the loan as soon as possible to reduce the overall cost of borrowing.
Usually, you won't need to make monthly payments, but the interest is rolled up, and the total balance becomes payable at the end of the term.
There are a few different structures:
- Build to sell, where the developer expects to sell the property to cover the loan.
- Built to rent, to repay the loan through a longer-term buy to let mortgage.
- Combined lending, where some of the development is sold, and some are retained to rent out.
What are the Eligibility Requirements for Developer Finance?
The critical requirement is to demonstrate the feasibility and a sound exit strategy. Provided there is enough collateral to back up the borrowed amount and verify the costs; a lender will usually be happy to make an offer.
They will need to see:
- Budgets for the building work.
- Contingencies for unexpected expenses.
- Feasibility information showing how much the development should sell for or be valued at.
- Timescales for project completion.
- Planning permission.
- Evidence of your development experience.
- Details of supporting professionals - such as builder, project managers and architects.
Professional Advice with Property Development Finance
If you're interested in comparing property development finance with other options or wish to check out the best rates currently available on the market, please call the Revolution Brokers team on 0330 304 3040, or email us at [email protected]
As an independent, whole-of-market broker specialising in commercial and development mortgages, we are on hand to ensure your deal is structured to offer the most advantageous terms and rates around.
How Long Does a Property Development Finance Agreement Take To Release Funds?
Development finance isn't paid in one lump sum. You usually receive the first payment towards the purchase cost of the land or property and then draw down funding in stages as the development progresses.
Do I Have to Pay Development Finance Interest Charges Every Month?
Not if you don't wish to! Revolution regularly negotiates development finance with rolled up monthly interest.
That means you don't need to budget for ongoing costs throughout the development but can repay this along with the capital sum at the end of the term.
