What are my property development finance options
When planning a property development, having the right finance in place is key to ensuring a successful project and a good return on your investment. Getting your finance right means no unnecessary delays and that you don’t pay too much in interest and fees, cutting into your profit.
There are various different options for funding property developments, not all of which are appropriate for all types of developments. Understanding which types of property development finance can be used for the kind of development you are undertaking can speed up the process of finding finance and avoid wasting valuable time and money.
In this article, we explain the different types of property development finance options and which types of property development projects they are appropriate for.
Types of property development finance
There are many different ways to finance a property development, but some of the most commonly used options are:
If you are building a home for yourself, you may be able to access a self-build mortgage. This can give you the money to buy a plot of land and cover the cost of construction, leaving you with a property to live in and standard monthly mortgage repayments for the agreed term of the mortgage.
How much can you borrow with a self-build mortgage?
The amount you can borrow with a self-build mortgage varies, but it is common for lenders to cap your borrowing at around 75% of the projected cost of the finished project.
They will normally also state that the amount you borrow cannot exceed the cost of buying the plot and construction.
Where can you get a self-build mortgage?
Self-build mortgages are a fairly niche mortgage product, only offered by a relatively small number of lenders. These tend to be private banks, intermediary-only subsidiaries of high street banks and some building societies. It is therefore worth using an independent mortgage adviser if you want to go down this route, to give yourself the widest range of options so you can get the best deal.
What types of property developments can you use a self-build mortgage for?
Self-build mortgages are commonly used for:
- Residential new build projects
Bridging finance is one of the most commonly used options for funding property developments as it offers a fast, flexible way to raise significant amounts of capital. Bridging loans can often be arranged in as little as 5-7 days and loan terms commonly extend from 1 up to 36 months.
Bridging loans are a type of short term finance which offers a temporary solution when other types of funding are not available or appropriate. Bridging loans can be secured on property or on development sites, making them ideal for property renovation, conversion and ground-up developments.
When using bridging finance for property development, it is important to bear in mind that you need to specify an “exit strategy” for the loan. This means agreeing with the lender exactly how the loan will be repaid within the agreed loan term.
Your exit strategy will depend on the type of property development and your goals, but common solutions including taking out a residential, commercial or buy-to-let mortgage, selling the finished property or selling other property from your development portfolio to cover the repayment.
How much can you borrow with a bridging loan?
Bridging loans can allow you to borrow large amounts of money, with loans of up to £25million often possible for larger development projects.
You can normally borrow up to 75% of the costs of a property project with a bridging loan, or up to 60% of the Gross Development Value (GDV) i.e. how much the property will be worth once finished.
Where can you get a bridging loan?
Bridging loans are normally only available from private banks and intermediary-only subsidiaries of high street banks. To access a bridging loan, you will normally need to use a bridging loan broker with access to these kinds of specialist lenders.
What types of property developments can you use bridging finance for?
Bridging finance is commonly used for:
- Residential and commercial new build projects
- Renovating and refurbishing existing homes
- Converting commercial and agricultural properties to residential
- Redevelopment projects
If you are an experienced developer with a track-record of successful property projects, you may be able to borrow up to 80% to 80% of the cost of a property development. This can allow you to move forward with new opportunities while your capital is still tied up in previous projects.
If you are not an experienced developer, your options may be more limited, but some lenders will be willing to work with you if you take on the project as a joint venture with an experienced builder. This means you both become partners in the project, rather than you employing the builder to work for you.
If you already have the main finance in place for your property development, but would like to reduce the amount of your own capital invested in the project, you may be able to take advantage of a mezzanine loan.
Mezzanine loans are a type of second charge loan, meaning they sit behind your main loan. They are only normally available to developers with an existing loan in place that covers the majority of their costs.
Where can you get mezzanine finance?
Mezzanine finance is mainly only offered by specialist property development finance lenders. To find out your options, speak to an independent development finance broker.
How much can you borrow with mezzanine finance?
With a mezzanine loan you can usually increase your borrowing up to 90% of the project cost or 70% of the GDV.
What types of property developments can you use mezzanine finance for?
Mezzanine finance is commonly used for:
- Residential and commercial new build projects
- Redevelopment projects
Common issues with property development finance
There are various common issues property developers come across when planning their projects. Knowing which kind of finance can best address these issues can help make your property development smoother and more profitable.
If you are planning to renovate, refurbish or convert a property, you may find that lenders class it as “unmortgageable”. This usually means either the value of the property is too low (under £40,000 is a cut-off for many lenders) or that they deem the property not habitable (e.g. there is no functional kitchen and bathroom).
Bridging loans are a common solution to this issue as they can be secured on low value property and property which is not currently inhabitable. This can give you the money to carry out the necessary works to bring the property up to a mortgageable standard, allowing you to refinance with a mortgage.
To ensure a good return on your investment, it is sensible to minimise the amount of interest you pay. Self-build mortgages, bridging finance, development finance and mezzanine finance will all usually allow you to take the money in instalments as and when needed.
This means you only pay interest on the money you have already taken, reducing your overall interest for the full project. Typically each instalment will be released when the build reaches set milestones, e.g. being out of the ground, wind and water tight etc.
With bridging finance, development finance and mezzanine finance, you may also have the option to “roll up” your interest. This means you pay it all in one go when you repay the loan, meaning you do not need to find the money for monthly interest payments during the build.
Not being able to borrow enough
If you cannot borrow enough to cover the required costs of your project, or realise you need extra funds when the build is under way, a bridging loan can be an ideal solution.
Bridging loans can be secured on more than one property, meaning you can raise capital against your home or any other property you own. This can allow you to quickly raise the extra money you need to keep your project on track.
Compare property development finance options
Whatever type of property project you are working on, getting the right property development finance in place is crucial for a successful build. With so many different types of development finance to choose from and a wide range of different lenders on the market, knowing which offers the best deal for you can be a challenge.
At Clifton Private Finance we have established links with all the top property development finance lenders. This means we can quickly and efficiently find you the best property development finance currently available that matches your needs.
Our experienced team know how to avoid all the common issues and potential roadblocks, ensuring your development finance is in place as soon as possible. That way you can focus on getting on with your development project, knowing your finances are taken care of.