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In this article we’ll look at some of the most common questions that we get asked about property development finance as mortgage and development finance experts.
This includes everything from explaining the difference between development finance and bridging finance to understanding how development finance is released.
It’s important to remember with any kind of big financial decision there is no such thing as a stupid question so however small or silly it might feel, it’s important to ask about anything at all that you’re not 100% clear about. We have a team of experts available to help you through the process of researching and finding the right property development finance option for you.
Let’s dive right in and start answering some questions.
Property development finance is a short-term form of borrowing that’s known for being flexible in terms of how much you can borrow and for what purpose. For this reason it’s popular with developers who are looking to either redevelop a site or build a project from scratch either for residential or commercial purposes.
There are many similarities between a bridging loan and development loans in terms of the typical term of the loan, its flexibility and the sort of rates you might be able to secure.
The main difference with property development finance is that rather than borrowing all the cash upfront as one lump sum to make a purchase, it is released in stages throughout the project.
For example, you may have an initial chunk of cash released to buy the land where you plan to build, another chunk to pay for the first phase of the build, and a final amount of cash once you hit a certain point in the development. Lenders will usually monitor progress and want to see that your project is on track in terms of timescales and finances before they release each new tranche of money.
You may also find that you can typically borrow more with property development finance than with a bridging loan.
Let’s look in a little more detail at what are sometimes called ‘tranche drawdowns’. This is simply a term used to describe the release of development finance funds in stages rather than as one lump sum. When you make your application, you’ll agree a series of key points in the development process with your lender, where a new chunk of funds will be released.
Throughout the build, the lender will come and inspect progress before a new tranche is released. This way of releasing funds is very similar to a self-build mortgage. It’s useful for you as a borrower as it helps to keep your progress focussed and it means you pay less interest overall than on a bridging loan as you’ll only pay interest on funds that have been released rather than paying interest on the full loan amount from day one.
One of the great things about property development finance is its flexibility. There are a huge range of uses for it, including residential projects, commercial uses and semi-commercial development. A semi-commercial project is one that includes both residential and commercial uses, for example a development that includes retail units on the ground floor with flats above.
Some examples of how property development finance could be used include:
Yes, it can be. Obviously it will depend on your personal circumstances, but interest rates definitely aren’t cheap on property development finance, especially if you have the finance for a longer period than average as interest can start to stack up.
The best way to keep costs low is to use a specialist broker with experience in property development finance. They’ll be able to shop around and negotiate on your behalf to secure you the best deals and keep your borrowing as affordable as possible. When you’re dealing with large sums of money, even very small differences in interest rates can mean potential savings of thousands of pounds, so it really pays to get expert help and find the best possible rate.
Most property development finance is taken out over a period of anything up to around 24 months, although sometimes slightly longer depending on your specifics needs. The term of the loan will reflect the nature of the project - for example a simple refurbishment of one property may only need six months from start to finish whereas the development from scratch of a multi-property development might need two years to complete.
It’s important to be realistic about how long you’re going to need to get the work done so that your finance can cover you for unexpected delays.
Although this type of finance is similar to bridging loans in many ways, one of the differences you might notice is that development finance tends to be available for larger projects and therefore large amounts. It’s not uncommon for a development finance facility to be for several million pounds or more, depending on the nature of the project. In some cases borrowing can be up to £1 billion.
The amount that you specifically can borrow will depend on a whole range of factors including the lender, your experience as a developer, your LTV, the predicted value of the completed project and the robustness of your exit strategy.
Property development finance is always set up on an interest only basis, so you won’t repay any of the capital until the end of the term. Interest will accrue on the capital over the term of the loan and can be paid monthly, known as serviced interest, or paid with the capital at the end of the loan.
Yes you can. Unlike traditional mortgages, which often carry a penalty for early repayment within a fixed term, property development finance doesn’t normally carry early repayment charges.
As well as the interest you’ll pay on your development loan, there are several other costs you’ll need to factor in if you’re going to make sure you’ve got the resources to afford your borrowing.
The main lending costs you’ll need to consider will be:
We hope that in this article we’ve answered some if not all of your questions about property development finance, but there are sure to be more that either remain unanswered now or that occur to you throughout the process. Whatever your query, we’re here to help, so don’t hesitate to get in touch.
We know how important it is for you to have complete confidence in us. Put your trust in our advice and you'll definitely improve the chances of a Bridging Loan & Development Finance approval - at the best available rate.
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