How to get a property development loan
Property development can be a rewarding business, but to make sure any development project is a success, you need to have the right funding in place. This ensures the project can progress smoothly, with no hold-ups due to lack of funds, and gives you the best chance of making a healthy profit.
Whether you are new to property development or already have some experience, knowing which is the best funding option is not always straightforward. There are many factors to take into account to make sure you get the best deal, helping you to keep your costs down and maximising your returns.
To help you get started on identifying the best property development loan for your project, we break down some of the main options, which types of projects they are suitable for and how you can access them.
What types of property development loan are there?
There are various options when it comes to funding a property development, although not all of them are usually available to all types of developers. The most common property development finance options, including property refurbishment finance, are outlined below.
Generally speaking, you can only get a mortgage on a property that is currently considered habitable i.e. is wind and water tight with a functional kitchen and bathroom. However, there are a few ways you can use a mortgage to fund a property development.
One option is to remortgage another property you own to raise the money. There are also some specialist mortgages aimed at certain types of developers. Self-build mortgages are aimed at people looking to build their own home from scratch, while refurbishment mortgages are sometimes available for light renovation projects.
Self-build and renovation mortgages are usually only available from private lenders, specialist subsidiaries of high street banks and some building societies. They tend to allow you to borrow up to 75% of the estimated value of the finished development, known as its Gross Development Value (GDV).
Bridging loans are one of the most commonly used forms of property development finance and are the main source of property refurbishment finance. They can be secured on a wide range of property developments, including unmortgageable property and development sites for new builds.
Bridging loans are a type of temporary short term borrowing, usually offered over 1-36 months. They can often be arranged in as little as 5-7 working days, offering a fast solution when you need to keep a project moving forwards.
You can usually borrow up to 75% of the cost of the development, including buying the site and construction costs with a bridging loan, or 60% of the GDV. You will need to specify an exit strategy when taking out a bridging loan i.e. how the loan will be repaid. This is usually achieved by refinancing with a mortgage when the development is complete or selling the finished development.
100% development finance
Experienced developers may be able to borrow up to 100% of the cost of a development with 100% development finance. This can allow professional developers to snap up new development opportunities while their capital is tied up in existing projects.
Less experienced developers may be able to access 100% development finance if they enter into a project as a joint venture with an experienced builder. This means taking on the project as partners, taking out the loan together and sharing the profits.
100% development finance is usually only available from specialist development finance lenders who are normally only available via professional loan brokers.
If you already have a loan in place to cover the majority of your construction costs, but would like to reduce the amount of your own capital invested in the project, you may be able to take out a mezzanine loan.
Mezzanine loans sit as second charge loans behind the main loan and can allow you to increase your borrowing to up to 90% of the project cost of 70% of the GDV.
Mezzanine finance is normally only available from specialist development finance lenders accessed via professional finance brokers.
Choosing the right type of development finance for your property project
Which type of finance you can get for your property project will depend heavily on the nature of the development. Knowing which type of funding will be appropriate for your development can help narrow down your search, saving you a lot of time and effort.
Property renovation, refurbishment and conversion
If you are renovating, refurbishing or converting a property to live in, you may be able to use a mortgage, depending on your circumstances. It is worth bearing in mind that, if you are buying at auction, there is usually a 28 day (20 working days) limit to complete the purchase, which is usually not enough time to arrange a mortgage.
For most renovation, refurbishment and conversion, however, a bridging loan is likely to be the best option. This allows you to quickly raise the money you need (ideal for auction purposes), carry out the necessary works, then refinance or sell on the property as required.
New build developments
If you are self-building a home for yourself, then a self-build mortgage could be a good option, although the range of lenders for these is fairly limited. A bridging loan may, therefore, still be the best option in many cases, especially if you want to move forward quickly with a development opportunity.
For professional developers, bridging loans, 100% development finance and mezzanine finance will all be potentially useful options. Knowing which is right for you can be hard, which is why professional developers almost always use development loan brokers to help them find the most appropriate and lowest cost finance for their projects.
Applying for property development finance
To have the widest range of options and give yourself the best chance of getting a good deal, it is a strongly recommended to use an experienced, independent property development loan broker.
They should have access to all the top lenders and the best rates and can advise you on which types of finance are appropriate for your development and help you find the best deals currently available. They will also know the common issues which can hold up getting finance and how to avoid them, preventing unnecessary delays which can slow down your build and end up costing you more money.
By using a specialist development finance broker, you can therefore get affordable development finance quickly and with the minimum of hassle, allowing you to focus on getting on with your development.
Find a property development loan
Knowing which type of finance and which provider offers the best deal on a property development loanfor you can be complicated. The right funding can make a big difference to the profitability of your project, so it is really important to make sure you choose the right option.
At Clifton Private Finance, our brokers have established links with all the top property development loan lenders. This means, we can quickly find you appropriate finance at the most affordable rates while minimising any potential roadblocks.