What loan sizes & terms can you offer?
Property Development finance covers a wide range of projects of different types and sizes. Minimum loans tend to start from around £50,000 with no real defined maximum. Projects can run into hundreds of millions, or 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 the build of the scheme. Once completed, the loans are repaid, generally, through the sale of the property or refinance on to a longer-term loan such as a commercial mortgage.
The maximum term across the market is 48 months, with most 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. Therefore, they could increase the interest rate and fees charged.
What interest rates can I expect to pay?
The interest rates offered by lenders vary a great deal across the market. Experience, loan amount, site location and the amount of loan as a percentage of the 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 6.5% per annum, however, these rates are generally only available for experienced property developers.
- A loan of above £500,000 to an experienced developer at a loan to GDV below 70% would most likely be charged between 4.5% and 7.5% 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.
Rates from 6.5-7% are common for most applications for experienced developers on loans of £1,000,000 and more. To see a selection of the latest rates based on your circumstances, head over to our development finance comparison page.
What fees will I 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.
- Exit fee: 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.
- Broker fees: Brokers often charge fees for 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.
- Valuation fees: As mentioned above, the lender will instruct a valuation to complete a report on the development. There is no set valuation fee 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.
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.
- 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. Some lenders ignore the day 1 position as long as the project fits the LTC and LTGDV metrics.
- 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 75% e.g. if the completed build value is £1m, the maximum loan to GDV would be £750,000.
How is the monthly interest handled?
In almost all cases, the interest is rolled up and majority of fees added to the loan. This means there are usually no monthly payments to make.
Should you choose to pay the interest each month, some, but not all lenders will allow this. It is rare for a developer to choose to pay monthly, as cash flow is already difficult to manage during a project, so monthly payments are usually unwelcome.
Where you’re choosing to pay the interest monthly, further detail around your income and ability to make payments will be required.
How can I get a lower rate?
The rate charged may be reduced slightly if you choose to put down a larger deposit. Generally speaking, the biggest factor in setting the interest rate is the experience of the developer.
Each lender has their own pricing structure and the difference in cost can be significant, even where the headline rate charged is identical. We scour the market to secure the best deal for you, comparing all costs.
As these loans are priced on a case by case basis, shopping around is the only way to ensure you’re getting the best deal. A good broker will do this for you. When working with a broker, make sure they’re experienced in the field as it is very specialist and can be complex for the uninitiated.
In many cases, first time developers will pay a higher rate on their first project, in order to get started in the industry.
What other security do lenders usually require?
Where you’re completing the project in your own name, you will already be personally liable for the debt.
Applications made through a limited company will usually also require a personal guarantee (PG). This can be for anything from 20-100% of the loan amount. The lender will expect to see sufficient assets to cover the personal guarantee amount.
We are able to arrange personal guarantee insurance to offer a degree of protection if you’re uncomfortable about offering a PG.
In addition to the PG, a debenture over the borrowing entity (your limited company) is also required. This is part of the reason that developers use a separate SPV Ltd company for each build.
Development finance lender criteria
The lender will look at the metrics in the section 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 1’ 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, or a quantity 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 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 draw downs.
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.