What is development finance?
Development Finance is a popular form of short-term finance used for property development and construction projects. It can fund the purchase of a plot of land with planning permission, or an existing building renovation. It can also be used to cover the associated costs of materials and labour for both residential and commercial developments.
Development Finance schemes are available to new, first-time, or experienced property developers. This flexible finance is used for ground-up developments such as building on land, although can also be used for heavy property renovations, such as a barn conversion or property layout changes.
So, how does it work?
Development Finance is broken down in to two stages. The first stage is used to purchase land or an existing property for development. In some instances, lenders will allow borrowing of up to 75% of the current value.
The second part of the loan is used to pay for the build costs. This part is normally funded in stages as the project progresses. Generally, each stage is signed off by a surveyor to allow the next stage of funds to be released by the lender.
Some lenders will allow borrowing of up to 100% of the build and labour costs.
So, how much can I borrow using Development Finance?
The maximum loan amount you can borrow depends on three main factors:
- The current value of the land or existing property.
- The build costs.
- The ‘Gross Development Value’ also known as GDV. Which is the estimated value of the completed project.
Typically, up to 75% loan to gross development value is available. This means that if the Gross Development Value is £500,000, borrowing of up to £375,000 is available.
How is Development Finance repaid?
A clear exit strategy to repay the loan is needed before Development Finance is agreed by the lender. Normally this will come from either the sale or refinance of the completed property.
Development finance is a highly specialist form of funding. It is therefore important to speak with an independent broker to get impartial advice before taking out development finance.