Loan Sizes, Terms And Interest Rates
Property Development finance covers such a wide range of projects. Minimum loans tend to start from around £50,000 with no real defined maximum. Projects can run into hundreds of millions, or even beyond and lenders will be happy to fund at this level, subject to demand.
Property development loans are designed to be used as a short-term loan, funding only during completion of the scheme. Once completed, the loans are repaid, generally, through the sale of the property or refinance on to a longer-term loan.
The maximum term across the market is 48 months, with the vast majority of lenders offering loans up to a maximum of 18-24 months. Any loans that will be required for more than 24 months are likely to restrict the number of lenders willing to accept the application and could, therefore, increase the interest rate and fees charged.
The interest rates offered by lenders vary a great deal across the market. Experience, loan amount, site location and the amount of loan to gross development value (GDV) play great roles in deciding the rate charged. Smaller loans, usually below £500,000 tend to pay a higher rate due to the amount of work involved in managing a project. Loans tend to start at around 4.75% per annum, however, this is extremely rare. A loan of above £500,000 to an experienced developer at a loan to GDV below 70% would most likely be charged between 6.5% and 9% per annum depending on demand and quality of the scheme. For smaller or higher risk loans, a rate between 0.85% per month and 1.35% per month (10.2% to 16.2% per annum) is more realistic.
What Fees Am I Likely To Have To Pay?
Lenders tend to charge a number of fees, for ease, we have broken these down:-
- Arrangement Fee – The arrangement fee, often known as the facility fee is usually charged by the lender as a set-up fee for the loan. It is generally between 1-2% of the loan.
- Valuation Fees – As mentioned above, the lender will instruct a valuation to complete a report on the development. There is no set valuation fee and but it tends to be higher for more expensive schemes.
- Professional Fees – On top of the valuation fee, other professionals are likely to be needed and of course they will charge for their services. Expect to pay out for architects, quantity surveyors and solicitors. Depending on the scheme you may also need to pay for project managers and monitoring surveyors.
- Exit Fees – This is not charged by all lenders, but the majority do. The fee is payable to the lender when repaying the loan. Generally, the charge will come in at 1-2% of either the loan amount or GDV. It is important to understand what your exit fee is charged against as the difference between a charge against loan amount and GDV can be significant as the example below shows.
- Broker Fees – Brokers often charge fees for the finding the best lender and managing your application to completion at the best possible terms. Some lenders will pay the broker a fee for successfully placing the application with them (usually 1%), while others will pay nothing.
At ABC Finance, we usually expect to earn 1% from a successful development finance application, which will mean we wouldn’t generally charge a broker fee as long as the lender pays us.
LTC, LTGDV & Ongoing Position, Cash Flow, Stage Release Payments
The maximum loan on property development finance applications is decided using several factors. Unlike traditional mortgages that are able to use the loan to value to determine the maximum against a property of a certain value, development finance has to use several calculations. They are:
- Loan to cost (LTC) – Loan to cost – LTC – is a metric used to compare the amount of loan offered as a percentage of the total cost of building the project. Loan to cost often comes in at between 80-100%. 90% LTC is common subject to meeting the criteria around loan to GDV. E.g. if the construction costs are £500,000, 90% LTC would be a loan of £450,000.
- Loan to gross development value (GDV) – The loan to gross development value is the maximum loan expressed as a percentage of the GDV – the value of the project once completed. Excluding joint venture development finance, the maximum loan to GDV available currently is 80%. E.g if the completed build value is £1m, the maximum loan to GDV would be £800,000.
- Day 1 position – Lenders will always look at the amount of money they are expected to release upfront to get the project moving and purchase the site. The maximum available is generally 65-70%, with more sometimes available if suitable additional security is offered.
The lender will look at the metrics above and will lend based on the lower of the loan to cost and loan to GDV. While the headline maximum loan will be based on these figures, the day one figure and the ongoing cash flow of the scheme is just as important.
The difference between the total loan and the amount released on day one is released through stage payments throughout the build rather than in one amount.
Before each stage payment is released, the lender will usually instruct the surveyor to re-inspect the site to ensure the work has been completed to a satisfactory standard. They will also want to ensure your project is progressing well and is on track. Your offer letter will state the cost of the re-inspections clearly and you need to account for this cost as part of the overall cost of finance.
The lender will look at your costings and take the opinion of professionals to ensure your cash flow is not compromised throughout the build and for the timing of stage payments. It is important that your costings are as accurate as possible because they will be used to project likely points for staged drawdowns.
A form of protection will usually be inbuilt through insistence on a contingency fund. A contingency fund is an amount of money set aside to cover delays or unexpected increases in costs. Property development is a complex undertaking and as such a contingency fund is an essential consideration. The larger your contingency fund, the more unexpected costs you can afford to absorb, making the transaction much safer.