What Is Development Finance?
Property Development finance is a type of funding used to fund the construction, conversion or heavy refurbishment of buildings. The loan is usually set up as a short-term loan to fund from start to finish of the project, prior to sale or refinance once the property is complete and ready for occupation.
Property Development finance is often broken down into 2 distinct parts. The first is to fund the purchase or refinance of the site, secondly, the lender will release funds for the build. The funds for the build are generally released in stages, which we will cover in detail later in this guide.
Given the range of projects, development finance is used by many different types of developers. Whether a full-time property developer, a company, a self-build enthusiast or a private individual with an opportunity, property development finance could be right for you.
What Is The Application Process?
The application process runs as follows:-
- Before talking to anybody, you will need to work out a rough idea of costs, end value, profit margin, how long the project will take and viability
- You will then discuss your needs with either a lender or broker who will talk things through and assess the project.
- Assuming the scheme is viable, you will then receive a quote in writing detailing the interest rate, fees and headline borrowing terms, along with a list of documents needed to submit a full application.
- The application will be completed and submitted to the lender (if submitted through us, they will be submitted alongside a comprehensive report on the project).
- If the lender is happy with the initial application they will want to meet you and visit the site. This helps to understand the project and build a relationship between you and your dedicated lending manager. We will work with you to arrange the site visit and will often attend to help you to answer any questions.
- After the site visit has been completed, your lending manager will usually take your application to the credit committee. These are the underwriters who sign off the application as acceptable to the lender. Once approved, the lender will issue the formal offer, subject to valuation and legal work.
- A surveyor is instructed to compile a valuation report on the project. It will be comprehensive, covering the current value, anticipated build costs, anticipated gross development value and expected demand.
- Your solicitor is instructed to carry out the legal work and satisfy all conditions. They will run through the terms of the agreement and ensure you fully understand the loan. Once satisfied, you will sign the formal offer and return it to the lender. It is important that your solicitor is experienced in dealing with development finance as inexperience here can slow the process down significantly.
- Once all of this is done, the funds can be released and the loan completed. Note that only the first stage of funds is released to your solicitor.
Residential Development Finance
If you’re looking to build your own home, there are 2 different products that are able to cover this. Firstly, you can take out regulated development finance. The ‘regulated’ part makes reference to the fact the loan is regulated by the Financial Conduct Authority (FCA). Development finance applications become regulated if 40% or more of the property is to be used as or in connection with a dwelling.
Regulated development finance works in much the same way as unregulated, but the lender will be careful to ensure the exit is realistic. If you plan on refinancing to a standard mortgage once the property is completed, checks will be done to ensure this is realistic. The lender will only release funds when they are confident that other lenders will accept the refinance.
The number of checks you have to pass may also increase slightly. The effect to you is that the application will take slightly longer, although the regulation shouldn’t make the application onerous. If you’re unsure whether you plan to live in or sell a property once built, it’s important that care is taken. You have to be clear before application that you may intend on living in the property and it would be advisable that you treat the application as if you will live in the property, even if you’re unsure.
How Important Is Previous Property Development Experience?
Previous experience is important from a lenders point of view. A lot of lenders are keen to see details of your track record before committing to a loan. There are, however, lenders who will accept a first-time developer if they appear capable of completing the project.
Having experienced people around you doesn’t replace personal experience. This will most likely make the lowest rates out of reach, but the potential to lend will still be there, especially if you already have a strong asset and income profile.
Repayments During The Build
Rolled up, or retained interest are terms used when monthly interest on property development finance are rolled up on top of the loan amount, rather than paid monthly. Any rolled up, or retained interest will have to be accounted for in the loan to GDV. This is something you will have to factor in when calculating the maximum loan.