A great deal of our clients work within property development, and so we tend to deal a lot with development finance, and many at first ask us, what is development finance?

With the hugely impressive performance of the UK property market over the last few years, many more investors, businesses and individuals are getting involved in property development, and this can take many forms.

For example, many of our clients will purchase a larger residential property and re-develop it into flats, or they’ll purchase a property at auction that’s in a state of disrepair and to development work in order to bring it up to a good standard to either sell it straight on or rent it out.

In its most simple form, development finance is simply a form of short term lending that provides funding for investors to develop properties before either selling them or renting them out as a landlord, or arranging for longer term financing such as a mortgage.

There are a few forms of development finance that we’ll run you through, with some more information on what’s involved, and we’ve also included a calculator for you to get a better idea of what the costs could be.

 

Who would use development finance?

Hank Zarihs Associates | What is development finance?Mainly, you’ll find that it’s property developers who use this type of loan or finance in order to bring their investment properties up to a high enough standard to either sell on the property for a good profit quickly, or to then arrange longer term finance such as a mortgage, as many high street or traditional lenders won’t lend against a property that isn’t inhabitable.

Many of our clients also find that they come across a great property investment and require quick access to capital in order to make the most of it.

Most typically, we find that developers will purchase a piece of land and use development finance in order to build on the land before selling the properties on. We also find that our developer clients will purchase an old commercial property, for example, and convert it into residential properties, and due to the fact that financing such a project can be problematic with many high street banks, they finance it through a shorter term deal with one of our lending panel.

We also have clients who will develop a large residential property into smaller flats or maisonettes, and in order to do the initial building development work they require shorter term access to funding and finance.

In truth, however, development finance can be used for a large range of property projects, and if you’re unsure about whether it’s the right thing for you, it’s usually worth getting in touch with one of our brokers or advisors.

 

How does development finance work?

So how does development finance work? After speaking to one of our brokers we’ll want to understand more about your project and what you’re looking to achieve. Are you looking for development finance to build on land from scratch? Are you looking to develop a commercial property into residential?

Once we understand your development we’ll then want to know how much you think you’ll need and what you’re planning to use it for. For example, if you’re looking for £250,000 to build 2 residential properties, what do you expect to spend it on? Building materials, architects? That detail is important.

Once we’ve understood that level of detail we’ll be interested in knowing when you think you’ll be able to repay the loan, and how long you think your project will take so we can understand the length of the loan you’re applying for.

Finally, we’ll need to know a bit more about you and your background. We’ll need to understand what your credit history is like, whether you’re applying as an individual or a business, and whether you’ve undertaken this type of project before. Our panel of lenders look favourably on developers who have good experience or a track record of success.

Once we’ve established these details we’ll submit your application out to our panel of lenders and get you some agreements in principle, and you’re then able to take a look over these and see which you feel suits your needs the best, at which point we will have you sign the paperwork and have the funds released to you.

 

Types of development finance

Generally speaking there are three types of development finance, and which of these categories you fall into will depend on what type of project you’re looking to work on. Here’s a quick breakdown.

Residential

Residential finance is fairly self-explanatory in that you’d be taking a development loan in order to develop a property that’s intended to be used for residential purposes.

This can of course come in different forms. It may be that you’re building a residential development on land that you’ve purchased or are looking to purchase. Alternatively you could be developing or converting an existing residential property.

This type of property development finance can be regulated by the FCA if you’re accessing the finance as a consumer, but not if you’re doing it as a business venture. Similarly, although obvious, residential applies to property that people will live in.

Commercial

Commercial loans for development would be for when you’re looking to either build, convert or refurbish commercial property that will be used for commercial or business use.

It may also apply if you’re taking out the finance as a business, however, our brokers and advisors will be able to give you further details about these loans.

Mezzanine

A mezzanine loan is a highly specialised type of loan and these bridging loans are only really appropriate for more experienced developers.

Essentially mezzanine finance will be used as bridging between the borrowers deposit and the senior lender. It can also be used as top of finance if unexpected circumstances crop up in between.

 

Check out our development finance calculator

Here we’ve included a development finance calculator to help you get a picture of what you may qualify for, what it may cost and what your repayments may look like.

It’s fairly straight forward and you’re able to play with the length of the loan, the interest rate, the amount and the deposit you have. This can give you an illustrative picture of the cost of this type of loan, however, if you’re looking to discuss this in more detail then you should get in touch with a broker.

Development finance examples

Here are a few examples of what this type of loan might be used for, and the cost.

One of our clients has bought a piece of land is looking to borrow £500,000 to cover the cost of developing 3 houses. They anticipate that this project will take 3 months and the gross development value will be £750,000. The Loan To Value (LTV) is 66% and the interest rate is 1.5% per month, with an arrangement fee of 1%. The client completes the project and sells all the homes, repaying the principle sum of £500,000 plus £10,000 in interest, and £5,000 for the arrangement fee.

One of our clients has purchased a property for £100,000 and is looking for a loan value of £20,000 to split the property into 4 flats. The client anticipates the building work will take 2 months and intends to arrange a mortgage after the building work is completed to let the flats out to tenants. The interest rate is 2%, with an arrangement fee of 1%. The work is completed on schedule and the client repays the principle value of £20,000 with £800 in interest and £200 for the arrangement fee.

Speak to our development finance brokers today

We’ve got a highly experienced team who have helped to fund millions in lending over the years for exactly these kinds of projects. They understand what our clients need to be able to have their applications approved, and what they need to do to get access to capital quickly.

We’ve also spent years building great relationships with a fantastic panel of niche lenders who are able to offer our clients some of the best rates and terms on the market, meaning that you’ll have access to exclusive rates.

We also appreciate that property development can be unpredictable, and that’s why we have cultivated ongoing relationships with our clients over many years, as they know that we understand the finance world better than anybody.

If you’re looking at property development and you want to talk over your finance options the best advice is to get in touch with us and speak to one of our highly experienced team today.

Types of development finance
What is a bridging loan?