Permitted Development Finance
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Permitted Development Finance Explained
What is permitted development finance?
Permitted development finance is a type of development finance whereby the project doesn’t require full planning permission.
They are loans secured against property where the works to be carried out are pre-approved under permitted development rights.
They can be set up to both purchase, and cover the cost of works for projects that fall under PD rights.
What are permitted development rights?
Permitted development rights is a term used for building or conversion projects that don’t require full planning permission application.
Created by the UK Government, they allow homeowners and property developers the right to extend, develop or convert building without the need to apply for full planning, saving time and money.
How can permitted development finance benefit me?
The main benefit of a permitted development loan is that it creates a funding solution for people who don’t have sufficient funds to carry out a project.
The funding line offers a drawdown facility for the works, meaning you can see the project through with little risk of running out of money.
How does it work?
PD finance works in the same way as standard refurbishment finance, the process is almost identical.
The key difference is that full planning permission isn’t needed, it can speed up the process as there is less information to work through.
What is PD finance used for?
PD finance can be used for almost any project that has PD rights in place. This can include:
- Some HMO conversions.
- Some commercial to residential conversions.
- Rear extensions up to 4m.
- Side extensions up to 50% up to the house’s width.
- Garage conversions.
Permitted development lending criteria
Will I qualify for PD finance?
If you own, or are buying a site eligible for permitted development, and have sufficient cash or equity for the deposit and to kick-start the work, in most cases yes.
What loan term can you offer?
Terms of up to 36 months are available, however in most cases a term this long won’t be necessary.
Most projects of this nature can be carried out within 12 months, and terms of up to 12 to 18 months being the most common.
FCA regulated loans are offered up to 12 months maximum. These are loans secured against your home, or a property you plan on moving into.
What checks will the lender carry out during the application process?
During the application process, the lender will check the following:
- Applicant’s personal and credit profile.
- Applicant’s development CV to demonstrate experience.
- Schedule of works and costs.
- A survey of the property, including QS report to confirm the work and cost.
- The repayment strategy, or exit route of the loan.
Although some lenders do require experience, loans are available to first time developers. In this case, the lender will need to be comfortable that the applicant is capable of completing the project, or that the contractor has sufficient experience.
Will I qualify if I have bad credit?
In some cases, yes, although this depends on the severity.
Minor adverse credit, such as the odd missed payment is usually acceptable. However, heavier adverse such as recent mortgage arrears, CCJ’s or defaults may impact your choice of lender.
Bad credit such as repossessions and bankruptcies does restrict the market, and the interest rate could be higher than those with a good credit rating.
In all cases of adverse credit, the lender will want an explanation of how this came about.
Who can take out a permitted development loan?
We can arrange PD finance for the following borrowing entities:
- Individuals, partnerships or LLP’s.
- Both experienced, and inexperienced borrowers.
- High net worth (HNW) individuals.
- Limited Companies, including Offshore.
- Overseas investors
How much can I borrow?
Minimum and maximum loan sizes
Loans for permitted development can range from £10,000, with no maximum.
Larger lending limits usually apply to loans in places like London and the South East.
Loan to value requirements
For purchases with the applicant funding works themselves, loans of up to 90% LTV gross are available.
If funds are also needed to cover the cost of work, up to 80% LTV net day 1 plus 100% of the cost of work is offered by some lenders, as long as the total loan falls below 75% of the GDV (LTGDV).
Does income affect my maximum loan?
In most cases, income doesn’t affect your maximum loan. The loan will be assessed on LTV, LTGDV, your credit profile and your exit strategy.
The only time income does impact your maximum loan is where your exit strategy relies on income, such as a remortgage. This is due the development finance lender wanting to ensure that the new mortgage will be enough to repay the loan.
Exit strategy & the impact on maximum loan
The exit strategy has a big impact on the maximum loan, this is because it needs to provide sufficient funds to repay the finance.
If the exit strategy is to sell the security property, the sale price will need to be enough to repay the gross loan. In addition to this, the sale will need to complete before the end of the loan term, meaning that the property may need to be priced to sell quickly.
If the exit route is to refinance, it is common for the maximum loan to be determined by the maximum amount that can be raised on the refinance.
UK Permitted development finance interest rates & costs
What interest rate will I pay?
Interest rates start at 0.39% per month for standard residential property, however this is a stepped interest rate. This means that the rate is low for a period, say 6 months, and high for the remaining term. These products can be useful if the facility is only needed for a very short time.
For a standard rate, even where 100% of the works are to be funded, interest rates realistically start at 0.76% per month.
For applications whereby the applicant is a first time developer, or high LTV’s are needed, interest rates are around the 1% per month.
Are there other set up costs to consider?
Yes, all lenders have set up costs and are all within a similar range, they are:
- Lender arrangement fee – the fee that the lender charges to set up the loan and are usually between 1-2% of the loan amount. This fee is usually added to the loan. Lower arrangement fees tend to be reserved for larger loans.
- Loan exit fee – some lenders charge a fee on repayment of the loan, if charged, it’s usually an extra month’s interest or 1% of the gross loan. We always look to use a lender who won’t charge an exit fee, where possible.
- Valuation fee – some lenders require a valuation of the property. This is to ensure it is suitable security for the loan and that the lender is protected. These fees generally increase as the property value increases.
- QS fee – A quantity surveyor (QS) is the person who will measure and estimate the cost of works for the project.
- Monitoring surveyor fee – This is usually tied in with the QS, a survey may be required at the point of each drawdown.
- Legal fee – there is a fee to pay for the legal work involved in setting up the loan. You are usually expected to pay the lenders legal costs, as well as your own.
- Broker fee – some bridging loan brokers charge broker fees for arranging bridging loans. This may be a flat fee or a percentage of the loan amount. Where charged, it is usually payable on completion. We don’t charge broker fees for arranging bridging loans.
Are there any upfront costs to pay?
Yes, you will be required to pay upfront costs before the loan completes. They are typically the valuation fee, QS fee (where the lender is funding the works), and legal fees for both you and the lender.
You can pay for, and instruct all of these together upfront, which is quicker, or just pay for the valuation and wait to ensure that the report is satisfactory before paying for the QS, and the same with legal fees.
Do ABC Finance charge fees for arranging permitted development loans?
In most cases there are no broker fees, a however a fee may be charged on loans below £100,000.
How to get permitted development funding
What is the application process?
– You can speak with lenders yourself, or speak with an experienced permitted development finance broker to run through your finance needs.
– When a lender, and product is chosen, your loan application form and supporting documents are submitted.
– The loan underwriter will assess your application and if happy to proceed, will instruct the valuation or run an automated valuation (AVM).
– When the valuation report is back, if the details are satisfactory the offer will be issued and legals instructed.
– Both yours, and the lenders solicitor will work towards a completion date.
Should I work with a broker or go to a lender direct?
This comes down to personal choice.
There is a clear advantage of using a broker if they don’t charge broker fees. An experienced broker will have a good knowledge of the market, and will know exactly where to turn.
The main advantage however, is that they will know how to package your application to give you the best chance of getting the loan approved.
What documents will I have to provide?
All lenders request similar information, you will likely have to provide the following documents:
- Application form.
- Details of how the loan will be repaid (exit strategy).
- Proof of ID, i.e. Passport copy.
- Proof of residency, i.e. a recent utility bill.
- Latest 3 months bank statements.
- Development CV detailing previous projects, if applicable.
- Month-by-month schedule of works and costs for the build.
How long does the application process take to complete?
The application process can take from a few days to 4 weeks, this depends on the complexity of the application.
Simple refurbishment applications are much quicker than applications where the lender is funding works, and complex valuations requiring a QS are involved.
Frequently asked questions
Are permitted development bridging loans risky?
As with any type of secured finance, there is an element of risk in terms of not being able to pay back the funding.
An experienced broker will be able to minimise this risk by assessing your application upfront to and highlighting any concerns.
Due to the stringent checks also carried out by the lender, valuers, surveyors and solicitors, they tend to be safe for property developers.
Can I repay my loan early?
In most cases yes, however there may be a minimum interest period of say 3 months.
Do I need to provide proof of income?
Most lenders will likely ask for proof of income, however not being able to provide evidence of income doesn’t mean that the loan won’t be approved.
What is the minimum deposit?
The minimum deposit needed is 20% plus fees and interest.
Can ABC Finance help me find the best deal?
Yes, as a whole of market broker we can assess your needs and situation and find you the best deal for your circumstances.
Is this type of finance regulated in the UK?
If the loan is secured as a first charge against your home, or the funds are to be used to develop your home, they are FCA regulated loans.
If the loan is for investment purposes, the loan is not regulated by the FCA, much like standard buy to let mortgages.
How can I calculate my expected costs?
You can use a bridging loan calculator to work out your costs.
Alternatively, when we have sourced the best product for you, we will provide you with lending terms detailing the costs, including the gross loan, interest and fees.
