Residential development finance explained
What is residential development finance?
Residential development finance is a type of funding used to finance the building or conversion of a property into residential units. It can be used to fund schemes from one unit to large projects of thousands of units.
Funding costs can vary widely between development finance lenders, meaning the cost of choosing the wrong lender can heavily affect the profitability of a scheme.
We offer funding from lenders across the entire development finance market and work on your behalf to secure the best possible terms for your project.
Regulated and unregulated loans
Your loan will be regulated by the Financial Conduct Authority (FCA) if you have ever or will ever occupy 40% or more of the finished scheme as your primary residence.
Where you’re building more than one property, and yourself and your family only intend to occupy one or some of the finished properties, your loan will be regulated if you’ll be occupying 40% or more of the gross internal area.
Not all lenders offer regulated property development loans, so it’s important that you ensure that the one you choose does offer them before applying.
Comparing residential development finance to self-build mortgages
Self-build mortgages are a hybrid product that combine residential mortgages and property development finance.
In many ways they are the best of both worlds, as the rates charged tend to be lower than development finance – although they are higher than standard mortgages.
These products should be the first port of call when you’re building a single property that you intend to occupy yourself.
Costs of residential development finance
What interest rate will I pay?
The rates charged vary depending on a number of factors. We can offer loans from 4.5% per annum, however these rates are reserved for larger loans to very experienced developers.
Rates of 6.5-9% are common depending on the borrower’s experience, credit history and the security offered.
Fees and costs
In addition to the interest charged, you’ll be charged a number of fees during the application process. The mains ones are:
Lender arrangement fee – this fee is charged by the lender and usually added to the loan. It generally ranges from 1-2% of the total facility.
Lender exit fee – this fee is paid when the loan is repaid, but should be considered upfront. While it isn’t always charged, where it is, it is usually 1-2% of the loan amount.
Broker fees – most brokers charge a fee for their service of 1-2% of the loan amount. They aren’t usually paid by the lender, so this is a necessity. We charge a fee of 1% on completion, with no upfront fees.
Surveyors fees – these fees are due for an inspection of the site by a chartered surveyor. They will produce a report that details the current value, GDV, likely demand and any other pertinent points about the scheme.
QS/monitoring surveyor fees – during the application process you will pay for the first visit of the QS (where one is used by the lender). Further visits will take place prior to each drawdown, with a fee payable for each visit.
Legal fees – these fees are charged to cover the legal expenses involved in completing the loan. You will be expected to pay both your own and the lenders legal expenses – this is standard across the industry.
How much can I borrow?
We offer funding from £50,000, with no maximum loan.
Loan to GDV
Funding is available up to 75% LTGDV, although 65% is more common. In addition to the LTGDV calculation, most lenders restrict the initial advance to 65% of the current site/property value.
Development funding applications are considered on a case by case basis, based on the strength of the application, with the interest usually rolled into the loan.
As there are usually no affordability restrictions due to the rolled-up interest, the maximum loan is usually decided by the lender’s maximum loan to GDV.
Where to get residential development finance
This type of finance is available through a number of different types of lender.
High street banks – these lenders tend to offer very low rates, but come with very strict criteria. They may offer lower LTGDV, and have a very in depth application process
Challenger banks – these lenders, also banks, have a slightly more relaxed view to lending. They will offer higher loan to GDV ratios and will still offer competitive rates and fees – even if they are slightly higher than those on the high street.
Specialist development lenders – these come in all shapes and sizes and most have a strong niche in the market. They will tend to offer more relaxed criteria but will generally charge higher rates.
The role of a broker
A good broker is there to make the process easier for you. Of course, not every broker is a good one, so it’s worth doing your due diligence before committing. There are a number of benefits of working with a development finance broker, although they do generally charge fees.
Brokers will generally have strong relationships with lenders and can leverage them when negotiations around terms take place.
Of course, many lenders accept applications direct from the public. This approach can save broker fees but does leave you to handle what can be a tricky application process alone.
Residential property development finance criteria
– Borrow up to 75% Loan to GDV (gross development value)
– Additional security considered in lieu of deposit
– Funding from £50,000 with no maximum loan size
– Funding available for experienced or inexperienced investors
– Funding available across the UK
– Regulated and unregulated funding available
– Terms from 1 month to 36 months
– Interest can be rolled into the loan with no monthly payments
– Adverse credit considered
Who can take out residential development finance?
We can offer funding to the following:-
- Limited companies
- Offshore companies
- LLPs and other company structures
- Overseas borrowers via a UK limited company
This list is not exhaustive and we are happy to consider any ownership structure.
How quickly can I complete?
We can usually complete residential development finance applications in around six weeks, although this can be reduced for urgent applications.
It is advisable to apply for your funding as early as possible to allow as much time for completion as possible. Some lenders tend to work much faster than others. By working to a tighter deadline, you may find yourself unable to work with certain lenders, due to the time it takes them to complete an application.
How is development finance repaid?
The main two methods of repaying your loan are to either sell the property or to refinance them onto a buy to let mortgage before renting them out.
Where the properties are to be sold, the lender will look at sales data for similar properties in the local area to ensure that your proposed marketing period is realistic. Where properties are slow to sell and require long marketing periods, you may find that your lender will insist on a slightly longer term.
Where you plan to refinance and let the units once completed, the lender will ask for proof that this will be possible. This is generally done by supplying them with an agreement in principle for your proposed lender or proving that you will meet the criteria. In both cases, we can help to provide this information for you.
The third option for repayment of your loan is growing in popularity. Development exit finance can be used to refinance the loan onto another short-term loan at a lower rate. This has the advantage of offering you cost savings during your sales period.
By taking this route, you can take the pressure off your sales and allow yourself more time to achieve the best possible price for your finished properties.
Development exit finance is usually available from the point at which the properties are wind and watertight.