Development Finance

Step one: Get your plans and documents in order

Applying for a bridging loan for property development can be a lot more complex than applying for something like a mortgage so there’s a lot more to do in the planning stages. As well as personal documentation such as proof of ID, address and financial dealings, you’ll need to prepare all the necessary documentation around your proposed development.

This could include, but isn’t limited to, architect drawings and plans, cash flow and construction cost and profit projections, planning permissions and estimates of other costs including valuations, surveys and professional fees. You’ll also need a clear and viable exit strategy to show your lender how you intend to repay the loan at the end of the term. For example, if you are building a development of homes, how much will you be selling them for, what’s the property market like in the area and how quickly do you anticipate being able to sell them?

Step two: Get copies of your credit reports

Lenders will want to carry out credit checks and you want to make sure there aren’t any surprises along the way, so check your credit reports with the three main UK credit reference agencies - Equifax, TransUnion and Experian - before you start your application. Having a history of bad credit won’t necessarily mean you can’t get development finance, but it’s important to know where you stand so that you approach the right lenders for you.

If you don’t want to apply to each credit reference agency individually then you could use a service like checkmyfile.com Checkmyfile brings together information from all three agencies into one report. A service like this is useful as not all agencies hold exactly the same information about you, and this prevents anything falling between the cracks. All of the big three and checkmyfile offer a free trial period, so you can get one off copies of your reports at no cost.

Step three: Find a specialist broker

Key to getting the best rates and terms on your development loan will be to work with a broker who specialises in property development finance. Many of the big niche lenders offering this type of borrowing are harder to find than a typical high street bank or building society, so it’s useful to have an expert on your side who has existing relationships with them. You may even find that some won’t accept applications directly from borrowers, but will only work through an intermediary. If you don’t have a broker then, you’ll be closing yourself off to potentially the best deals for you.

Using the right broker should save you time, money and stress, so it makes total sense to include one in your plan. If you’re not sure where to start, ask friends or colleagues for recommendations and be sure to read a good range of reviews online from real life customers. Trustpilot is a good place to start for this. Mortgagekey has over 2,200 reviews on Trustpilot, with an overall excellent rating.

Step four: Hand over everything to your broker

This will be the fact finding stage of the process where your broker takes an indepth look at your plans, exit strategy and circumstances to get a thorough understanding of your situation and what you need. This includes your credit history, so share copies of your credit reports with them too.

It’s through this fact finding that your broker will be able to focus on exactly what you need in a loan and which lender would be the best match for your circumstances. A good independent broker who specialises in development finance will have access to the whole of the market and should have existing working relationships with lenders too. They’ll be looking not just at headline terms such at interest rates, but also at other terms that could make one lender a better fit, such as arrangement and exit fees, interest rate repayment structures and maximum and minimum borrowing limits.

Step five: Get an agreement in principle

At this point, your broker will be able to approach the best lender for you and all being well, secure an agreement in principle. This first stage agreement will detail all of the basic information you need about your loan including interest rates, fees and duration. You’ll also be given details of exactly what you need to provide and any forms you need to complete to progress your full application. Don’t forget your broker is on hand throughout the whole process to guide you, so if you have any questions or are at all unsure about what you need to do when, you can ask them anything you need.

Step six: A site visit

As part of their assessment of your application, your lender will likely want to carry out a site visit. This helps them to understand the realities of your development and identify any potential issues.

If they are happy with the visit then all of your plans and documentation supporting your application will be considered by the lender and then you’ll be given a conditional loan offer, subject to a valuation.

Step seven: The surveyor’s report

A report will now be produced by a surveyor, evaluating all of the details of your development proposal including cost and profit projections and the viability of your exit strategy, normally based on the final value of the development and anticipated sale timescales.

This report will be a pivotal part of the process as the formal offer you’ve received is not legally binding at this point and will depend on the surveyor’s report confirming the strength of your development proposal and reassuring the lender that they’re in a good position to get the money back that they lend you.

Step eight: The legal bit

Now’s the point at which your formal loan offer turns into a legally binding agreement. It’s the job of your solicitor to go through all of the legal work associated with your finance and to ensure that all conditions are met. They will also make sure that you feel completely confident in what you’re agreeing to and that you understand the terms of the loan. It’s vital that you use a solicitor who has experience with development finance. This sort of borrowing can be complex, especially for large projects, and the process can be held up significantly at this stage if your legal team doesn’t have the relevant expertise.

Once you’re happy that you understand what you’re signing up to and all of the conditions have been met, you can sign your formal offer and return it to the lender.

Step nine: The release of funds

Once the paperwork is signed then the first tranche of funds can be released. Remember that development finance, unlike a bridging loan, is released as a series of payments throughout the project rather than as one payment at the beginning, so the first payment will be for the purchase of the land and the initial construction costs.

Step ten: Project monitoring

As the project progresses, your lender will want to make sure you’re keeping on track with your budget and timelines. They will normally do this by sending out an expert to carry out regular site visits. These visits will determine how further funds are released.

If all goes according to the plan, the final step will be project completion and repaying your loan in full. At this point you’ll be liable not just for the original capital amount, but for all interest accrued over the period if you have been rolling up interest rather than making regular monthly payments.

It’s worth noting that for rolled up interest payments, you’ll be charged interest every month not just on the original capital amount but also any interest accrued to date. This means that rolled up interest will cost you more overall than serviced interest.