As the UK property market has blossomed and thrived in the wake of the pandemic, inevitably, there has been a great deal of interest in it, and a great deal of investors looking to increase their exposure to UK property development and investment.
Subsequently, the number of companies, providers, investors, and lenders willing to fund development finance has increased markedly, given the successful increase in completed and lucrative projects over recent years.
Of course, each development finance provider will have slightly different interest and rates, however, broadly speaking, they’re all looking at finding more developers to provide finance to, and that has also meant a lot more investors are looking to get into the industry.
One of the most common enquiries we get about development finance is what development finance rates are, and what repayments as well as loans look like so that investors and developers can get a better idea whilst they shop around. We’ve put together here a quick guide to give you all the information you need about what is developent finance and rates.
Typical development finance interest rates
As mentioned, rates will certainly vary depending on the lender and the criteria, but broadly speaking we can give you quite a good idea of what the typical loan may look like for you.
What you pay in interest will depend on a few key factors, which are the Gross Development Value (GDV), term of the loan, and the amount.
Our Gross Development Value lending criteria usually means that our panel of lenders will lend up to a maximum of 75% of the total value of your development, but this is something you can discuss with our brokers if you want further information.
Our rates start from just 0.50% per month and the interest is rolled. Rolled interest just means that the total amount of the interest is added to the outstanding principle amount of the loan which would be paid at the end of the agreed term.
The minimum term is usually 1 month but can be extended up to a maximum of 36 months, meaning it’s flexible development finance. The minimum amount of your loan needs to be £1,000,000 but for a large development loan that minimum changes to £10,000,000 with a starting rate of 0.50% per month.
For a smaller development the maximum amount we usually are able to lend is £50,000,000 but that increases to £100,000,000 for a large development loan.
Now, if the amount of the loan as a percentage of the GDV is higher, you’ll usually pay higher interest. Typically, for a 75% GDV you’ll pay 1.10% per month, for 70% it would be 0.75%, for 65% it would be 0.56% and for 60% it would be 0.50%, respectively.
What factors affect the interest rate?
Whilst there can be a range of things that can affect your rate, and each lender on our panel will have different criteria, however, there are a number of key things you should be aware of.
- Your deposit – The size of your deposit will make a difference because, ultimately, lenders like to see that you’re taking on some of the risk too, and the more money of your own that you’re willing to risk, the better the rates for your development finance.
- Your track record – If you’re looking for a substantial loan in order to develop land or property then lenders much prefer to see applicants who have a track record of success. Finishing the project on time, selling the properties on successfully, these are factors that will be considered and if you’re a relative novice then you’ll be considered a riskier prospect.
- The amount of the loan – GDV is important, however, if you’re only borrowing a small amount then most lenders will charge higher interest as they won’t be able to make as much on your development finance.
- The demand for your properties – The area that you’re building in, enquiries, and similar properties in the area will count towards how viable your project is seen. If you can demonstrate that there’s existing demand and that you’re likely to find it easy to sell on your properties than this makes you less risky.
- Associated risks – Is the project on flood land? Do you have experienced sub-contractors? These are the types of questions that will also be considered in a risk assessment for your development finance.
Do I need to provide additional security?
This will depend on the aforementioned risk factors in terms of how risky a prospect you’re considered to be. Your credit history will also likely come into play here so that lenders can see what your previous payment history is like.
If the loan or development finance is for a substantial sum and you have adverse credit or, for example, if you don’t have much experience when it comes to developing property or you don’t have much of a deposit then lenders may ask you to provide further security in the form of an asset.
Typically, they may ask you to put up a property as security with a second charge on your mortgage, for example, however, this is something that can be discussed a little further down the line, and if you’d like to discuss this beforehand it’s worth speaking to one of our brokers who can speak to you about this in more detail.
How do I pay the loan back? Monthly or yearly?
The majority of lenders who provide development finance will want to see an exit plan for your loan. Common exit plans involve either selling the property or rearranging your development finance for something more long term.
Longer term development finance could either be a lower rate finance loan that covers you until the properties are sold or, alternatively, a buy-to-let mortgage on the properties if you intend to keep them and rent them out.
Most of our lenders want to see a clear exit plan before approving development finance and, typically, the loan is repaid in one lump sum at the end of the term. It’s rare for this type of development finance to be taken out for longer than 3 years, but there are arrangements that can be made and if you want more detail for your own situation then it’s worth speaking to a broker.
Development finance calculator
Due to the fact that development finance has a lot of competing factors we’ve created a calculator so that you can play around with different scenarios and get a better idea of what to expect.
There are different fields within the calculator that you can edit and change so that if you’re trying to decide, for example, how much to apply for and what deposit you’ll need, you can do that with our development finance calculator.
Fees associated with development finance
Due to the fairly complex nature of development finance, it means that there can be a number of different fees associated with the process. Below we’ve put together something of a comprehensive breakdown of what fees you might expect to pay throughout the process of arranging development finance.
These can vary, however, and this is to illustrate what you may pay, rather than what you definitely will pay.
Development finance broker fees
The majority of developers go through a broker or intermediary when looking to arrange development finance. This is usually because it’s much easier to get a better deal and get an overview of the whole market rather than trying to approach investors and lenders individually.
Brokers and intermediaries charge a fee for this process, typically between 1% and 2% of the net or gross loan value, and this is typically charged when the loan is drawn down.
Typically, most development finance arrangements will include an exit fee, charged once the loan has been completed. Most of the time this fee will be about 1%, but again this can vary between lenders, and something that a broker or intermediary advisor will discuss with you, and something you need to budget for.
These are the same as broker fees, and can sometimes be referred to as facility fees, and is the amount you’re charged by the broker or intermediary for arranging your finance, and is typically charged at between 1% to 2%, and payable once the loan is drawn down.
As with any type of finance or loan, there may be administration fees that are taken on by the lender or broker if it’s a particularly complex arrangement.
If, for example, you’re arranging development finance for quite a large project and that involves lots of paperwork, valuations, and other associated costs, the lender may include these fees in your arrangement and in the terms.
These will vary depending on what type of development finance you agree, and something you can discuss with a broker if you’re looking to talk about it in more detail with regards to your own specific situation.
Depending on the arrangement, the loan, and the development, there may be solicitors’ fees involved both on your part and on the part of the lender. In this situation, if there is legal advice required then the lender may include these fees within your agreement. Of course, due to the fact that this varies hugely, the fees also vary widely, so this is something that will be discussed later on in your loan arrangement.
When arranging a loan or finance, it may be necessary to get the land or the property you’re looking to develop valued. This could include surveyors and valuers, and this could potentially be expensive. Having said that, each project and development is different, so it may not be necessary, and if it is necessary for your development then there are options available.
As with any complex loan arrangement, and with complex finance, there may be other fees and costs involved. As an example, if you’re not very experienced with property development then the lender may require monitors who will come out and monitor the progress of your development to ensure that you’re on track to complete things on time. If that’s the case the lender may ask you to pay for the cost of this, but again this depends on the situation and the lender.
How to get property development finance
If you’re looking for a loan for a development, then the first step is to get in touch with one of our brokers who can go over the details of your proposed development with you.
From there we’ll get you an agreement in principle for your loan or finance before doing a development site visit. A valuation will often take place, and a formal loan offer will be made. A solicitor will then facilitate the signing of the paperwork and the first draw down can be made.
We provide development finance comparison to ensure you get the best rate
One of the main reasons our clients come through us is that we can do a comprehensive search of the market to ensure they’re getting the best possible deal and not having to waste time approaching lenders individually.
Can development finance be used for residential developments?
The short answer is yes. Because we have a lot of experience in finance, we’re able to offer our clients a range of options. Development finance may well be the best solution to your needs; however, we offer free advice to our clients and we can talk you through all the potential options.
Speak to our brokers today
Our brokers have years of experience in the finance industry, so no matter what sort of finance you’re looking for they can help you through the process from start to finish.
If this is something you’re considering then the first step is picking up the phone or dropping us an email to have a chat about what you need, so why not get in touch today?
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