UK Property Development Finance
Bridging finance for development is used to build a new building or convert an existing building. This can be residential houses, shops, offices or industrial buildings. It can be for investment purposes or owner occupied. You can be an experienced developer / builder or a first-time developer:
- A builder by profession who has purchased land and wants a loan to build houses that he will build and sell on. The developer may or may not have built from scratch before.
- An experienced developer where we will source the best possible rate.
- Someone building their own home.
The maximum you can borrow to purchase the site is anywhere between 50-60% of the purchase price depending on the project. The site would need to have planning in place or can be agreed subject to planning.
One can also borrow up to a 100% of the build cost provided that it is within 60% – 70% of Gross Development value (GDV) depending on the lender and experience (set on a case by case basis). Maximum term you can borrow for development finance is between 12- 36 months. Exit is usually sale of properties or refinancing.
Key Features of our Development Loans
- Loans from £25,000 upwards
- No tie-ins. In most instances you can repay the loan without incurring any early repayment charges
- No experience is required provided a building contractors contract has been provided
- Funds are available in stage payments and interest charged only on the money drawn
- Can use other properties as collateral
- You are not liable to borrow the full agreed amount should your build go below budget/plan
With property development finance the valuations tend to be higher than standard valuations and take longer to perform.
Development loan rates will vary depending on the project and experience.
Advantages of Development Finance
The biggest benefit of development finance is the way in which it allows borrowers to access much larger sums of money. In fact, it is the most extensive borrowing facility currently available on the UK market.
Initially, funds are provided to get the project underway. As the project continues, grows and edges closer to reaching its goals, more money is released for the developer along the way. The total sum of money lent can be up to 100% of the total cost of construction, with no specific upper-limits as to how much can be borrowed.
Additional advantages to development finance include:
- The ability to secure money on properties, plots and developments that may be considered unsuitable or unviable by other lenders. This includes rundown and derelict buildings.
- Development finance can be repaid relatively quickly, keeping overall borrowing costs to absolute minimums. Far more affordable than many long-term borrowing facilities.
- Interest is only charged on the funds released which again can impact the overall costs of the facility in a positive way. A benefit of funds being released in stages throughout the project.
- No specific limitations on how much can be borrowed. If the project is deemed viable, development finance may be offered to cover up to 100% of the costs, irrespective of the total construction cost.
What Are the Main Development Finance Costs?
Fees, charges and general borrowing costs vary significantly from one lender to the next. The following will apply in most instances as the primary costs of development finance:
Facility fee – More commonly referred to as an arrangement fee, the facility fee is calculated as a percentage of the total cost of the loan (gross or net).
Interest rate – Interest on a development finance loan can be charged on an annual or monthly basis. Annual interest rates of 7% are not uncommon, as are monthly interest rates of 1%. Longer-term facilities attach lower rates of interest, though cost more than those that are repaid quicker.
Exit fee – Sometimes called a completion fee, the exit fee is usually calculated as a percentage of the total cost of the loan (gross or net). Some lenders charge a percentage of the total value of the completed project – not the sum borrowed.
Broker fee – Some brokers offer their services free of charge for customers, receiving commissions from lenders upon successfully referring customers. Some brokers impose a fixed fee for their services or charge a percentage of the total value of the loan.
These are just some of the primary costs to take into account when considering development finance. Working with an independent broker will help ensure you gain access to the best possible deal to suit both your requirements and your budget.
At UK Property Finance, we usually do not charge a penny for the services we provide. No brokerage fees for borrowers and no ties, just the honest and impartial advice you need to make the right decision.
If a fee is charged, you will be informed of this in our initial quotation.
Other Development Finance Costs to Take Into Account
Additional development finance costs to take into account (which may or may not be applicable) include the following:
Valuation fees – It will usually be necessary for an initial valuation to be carried out by a neutral third party, in order to assess the open market value of the security. This will also typically include a projected valuation of the completed project.
Application fees – UK Property Finance does not charge application fees. Some lenders and brokers impose fees simply for submitting an initial application, or seeking advice on development finance.
Legal fees – If it becomes necessary to hire a solicitor or seek qualified legal advice, the applicant will be responsible for meeting all such costs accordingly.
Administration fees – This is a somewhat vague term, which can apply to almost any additional cost imposed by the lender. Some brokers also charge administration fees – UK Property Finance does not.
Monitoring fees – Development finance lenders will naturally need to monitor the progress of the project, in order to ensure it is reaching its predetermined goals. This is to make sure their investment is sound, and the funds allocated are being used as agreed. All monitoring fees are picked up by the borrower.
Draw down fees – Each time a new instalment of funds is transferred to the borrower, an additional fee known as a draw down fee may apply. This could be a set fee, or charged in accordance with the size of the instalment.
Telegraphic Transfer fee (TT Fee) – This is a cost imposed by the banks handling the money transfers, which in the case of development finance can be comparatively large. Nevertheless, TT fees are generally quite small and charged at a fixed rate.
The Development Finance Process
Development finance is always tailored to the requirements of the borrower and the specifics of the project. There are several key stages of development finance that remain relatively constant, which are as follows:
- Initial enquiry and obligation-free consultation
- Comparison of deals from specialist UK lenders
- Submission of initial application to suitable lenders
- Agreement in principle issued to the borrower
- Site visit to establish the project’s viability
- Independent valuation of the project’s total value
- Formal loan offer and final terms
- Solicitor involvement for legal support and advice
- Completion of the loan and first payment (drawdown)
- On-going instalments to fund the project
- Repayment of the loan as agreed at a later date
How is Development Finance Repaid?
You will only be considered eligible for development finance if you can show the lender evidence of a viable exit strategy. This means the method by which you intend to repay the loan, which in most instances involves one of the following:
- Sale of the property – where the property or site is sold upon completion of the project, raising funds to repay the loan in full.
- Refinancing the property – a developer exit product (usually offered at a lower rate of interest) is taken out to repay the initial loan.
- Long-term refinancing – suitable where the developer intends to retain ownership of the property long-term, perhaps to rent it out at a profit.
How Development Finance Facilities Are Typically Repaid
Interest is usually added to a development finance loan on a monthly basis. This is why it is advisable to repay a development loan at the earliest possible stage, in order to minimise overall borrowing costs.
In most instances, the total balance of a development finance loan is repaid through refinance or sale of the property:
- Build to sell – This applies when the developer completes a project with the intention to sell it (in full or in part) to cover the costs of the loan.
- Build to rent – This applies when a longer-term borrowing facility is used to repay the initial loan, while enabling the developer to retain ownership of the property to rent it out.
- A combined approach – This applies when the development is partially sold off upon completion, though a proportion is retained by the developer to be rented out.
Development Exit Finance
Some developers use developer exit finance to pay off their development finance debts prior to selling the development after its completion. The benefits of development exit finance include:
- Increasing profits and cutting costs, as exit finance can be a cheaper alternative to development finance at this stage.
- Bridging gaps between completion and sale, as the current loans term may come to an end before the sale is completed.
- Freeing up capital at an earlier date, enabling developers to get started on their next projects before completion of the sale.
By definition, exit finance is a specialist type of bridging loan – offered with a low rate of interest and as a strictly short-term lending facility.
Whole Of Market Development Finance
You may have just been granted planning permission and been given the green light so that you can finally go ahead with a brand new building project or you are a couple of months from the finishing line with an existing development of the property. There is a chance that you will need to raise additional funds at some point in order to get to the stage where everything is finally completed.
Whether you are:
- An experienced developer
- Looking to develop your first property
- Buying at auction to refurbish and flip for a profit
- Building a property portfolio
- Part way through a development and in need of funds to complete
- Converting an office block to residential under PDR
- Developing student pods
Why use us?
- We have the experience to see the deal through to drawdown
- Dedicated development finance team
- 100% of build costs funded
- Up to 75% of land purchase price and 100% with additional security
- Funding from £50,000 with no upper limit
- We are whole of market so can get the best deal for your development
- No upfront application fee
- Shortlisted as Best Development Broker in the UK
Obtaining Property Development Finance
Regardless of where you are in the overall scheme of things, finding a suitable source of development finance is one of the last things that you want to be worrying about. You will no doubt have enough on your plate with the day to day running of things making sure everything is going according to plan and that everyone is pulling their weight whilst carrying out their delegated tasks appropriately as you head towards your end goal.
In terms of usage, property development finance may be required for anything ranging from new build residential projects, mixed use buildings, strictly commercial developments through to the purchase of existing land or buildings which need to be refurbished to an exact specification within a set timeline. It can either be arranged outright at the beginning of the project or halfway through a building development and it is typically paid out in increments at varying points towards completion.
When applying for development finance the main considerations on the lender’s behalf are the assets you are able to offer as security and your ability to show how feasible the project is. The lender will also require additional information including how long the project will take to finish, the end value and a breakdown of all of the costs involved, including reasonable allowances for any unexpected or incidental expenses which may incur.
Once you are able to show that your project is worthy of investment in terms of economic viability and profit margin, you will also need to prove that you have the relevant planning permission and the experience to get things completed. If your own experience is somewhat limited then this is not usually too much of a problem as long as the people who are working for you have a proven track record with good credentials. This will include everyone ranging from the architect, your chosen project manager through to the actual builders themselves who you will ideally be employed under a fixed price contract in order to provide peace of mind for both you and the person who is lending the funds.
With this in mind it is absolutely vital that you find a property development finance broker that is highly experienced with access to a wide and varied panel of lenders experienced in providing development loans. Investors who are open to participating in any type of property development project regardless of size, scale or predicted time frame.
We Compare Lenders Providing The Best Development Loan Rates
Having developed a long fruitful relationship with all the top lenders in the UK allows UK Property Finance to deliver the best rates for bridging finance and development finance.
As fully accredited members of the National Association of Commercial Finance Brokers and the Association of Bridging Professionals, we are always willing to go the extra mile to ensure that the needs of the borrower and lender are met with minimum level of confusion and misunderstanding. This includes arranging bespoke property finance packages which are tailored to your specific needs whilst still maintaining a decent level of flexibility. We can also help to ensure your application is a success by offering invaluable help and advice as and when required.
100% Development Finance
UK Property Finance can arrange 100% development finance providing there is extra security available for the loan. If there is no extra security available then there needs to be sufficient profit to work with once the property development is completed. Industry standard from UK lenders to fund is 60% of the land value and 100% of the total build spend. We can arrange further funding through mezzanine finance depending on your situation. Make contact with our advisors should you wish to enquire further.
Frequently Asked Questions
We have funders who will fund these types of sites allowing you time to obtain planning permissions/change of use for further development.
Lenders will not be prepared to lend as much against the value of the land – we would look to obtain a loan equivalent to 50% of the value of the land. If there is an existing property on the site then this Loan to Value may increase.
Once Planning Permission is granted we can look to raise further funds against the increased value of the land and provide the funding you need for the build costs.
We will help you to put your plans together to ensure that when we speak to the lenders we will have a plan which works and which they can support.
Many lenders are happy to support first time developers and we can speak to these lenders on your behalf. To overcome your lack of residential property development experience the lender will want to ensure you have a good team around you who can give you the advice you need and may require a Fixed Price Contract from a reputable builder to ensure you have no unexpected cost over-runs. We will help you through this process and can recommend suitable professionals if needed.
We have secured finance packages
for these types of permissions and have many lenders happy to look at these transactions.
Lending against residential property development schemes is more about the scheme and the experience of the development team – rather than the credit standing of the individuals involved. That said, however, in some circumstances the reasons for the poor credit will put lenders off and so funding will not be available. Please talk to us and we will do our best to help you.
If you apply for funding through a Limited Company then the lender will require Personal Guarantees from the Directors but otherwise all will be the same as borrowing in your personal name(s).
All lenders have their own unique terms, conditions and policies regarding how much they are willing to lend. Calculating how much you will need to borrow means considering:
- The costs of the land
- Total development costs
- All applicable lender fees
- Solicitors/legal fees
- Brokerage fees (where applicable)
- Contingency costs
- Completion fees
Most development finance specialists offer up to 70% of the value of the land and 100% of the total build cost. However, it is possible to secure funding for 100% of the cost of the entire project.
Development finance is paid in instalments as the project progresses. An initial payment will be made to secure the site and get the project started, after which all subsequent instalments will be made as agreed in the loan schedule. It is therefore essential to ensure that all financial projections are as accurate as possible, in order to avoid running out of money at a key stage of the project.
The vast majority of development finance loans work in the same way, with monthly interest charges being added to the total cost of the loan. These are then repaid at the end of the loan term when the outstanding balance is paid in full. As it is unnecessary to pay the interest charges on an ongoing basis, the developer can focus all of their efforts and resources on the project itself. Where interest is charged on a monthly basis, repaying a development finance loan as early as possible can often reduce overall borrowing costs.