Property development can be highly rewarding but to get started you need to be able to access the right kind of funding. Unless you have significant personal wealth to invest, this means borrowing from a bank or other financial institution.
Borrowing for property development carries some degree of risk and for this reason, the interest rates and other costs associated with property development finance can be high. Talking to a specialist finance broker can save you time and money. In looking at your finance options a summary can be found below:
Types of property development finance
There are various kinds of funding that may be appropriate, depending on the sort of property development in question.
This is a type of short term finance often used by people buying property at auction to refurbish or redevelop. Bridging finance can usually be agreed and the money in your account within as little as 5 days, making it ideal for auctions where you have a short time frame to complete the purchase.
A bridging loan can give you enough money to buy a property, do it up, then refinance with a traditional mortgage or else sell the property on. However, bridging finance is seen as relatively high risk, so can be more expensive that some other forms of borrowing.
If you are taking on a large commercial development, you may want to look at lenders who offer dedicated property development mortgages. This can allow you to borrow significant sums and the finance will usually be paid out in instalments as the development progresses. This can keep your repayment costs down, as you will only pay interest on the instalments you have already received.
If you are building a property to use as your own home, some banks and building societies do offer dedicated self-build mortgages which can be an attractive option.
Lending criteria for property development finance
Each property development finance lender will have their own requirements for prospective borrowers. However, there are certain pieces of information most lenders will need when you make an application.
- The current value of the property/land at the development site
- A detailed breakdown of your projected development costs
- How much the completed development is likely to be worth
- How long the development is scheduled to take
- Your development experience
- What contingency funds you have in place
- Any professionals currently linked to the project e.g. architect, project manager, builder
- A copy of your planning permission
- Proof of building regulations approval
- Details of any relevant planning restrictions
If you are developing multiple lots for sale, it will usually be beneficial to your loan application if you have already sold some of the lots off-plan.
How much can you borrow for a property development?
There are various factors lenders will take into account when deciding how much they will be willing to lend you for a property development scheme.
Loan to Cost (LTC)
This is the amount a lender will be willing to let you borrow as a percentage of the total projected cost of your development. So, if you are looking at a total development cost of £1million and a lender is willing to offer up to 75% LTC, then you would be able to borrow up to £750,000.
The higher the LTC, the more risk to the lender, so this is likely to impact the interest rate they charge you. Most lenders will not want to exceed 75% LTC.
Gross Development Value (GDV)
This is how much the completed development is likely to be worth on the open market. Many lenders will offer up to 60% GDV as a property development loan.
If you are an experienced developer with a track history of successful property developments, lenders will likely see you as a relatively lower risk borrower. This means they may be willing to lend you more and/or give you more favourable terms, such as lower interest rates.
If you have significant assets, such as other property, you may be able to use these as security to borrow more. This can sometimes allow you to access cheaper borrowing, so may be a more cost-effective option.
How to apply for a property development loan
The process of applying for property development finance takes place in several stages. Depending on the type of loan and the lender, this process can take anywhere from a few days to several weeks.
Enquiry – Contact a loan advisor or lender directly to discuss your requirements.
Indicative terms – The loan advisor or lender will give an idea of the amount you may be able to borrow and the conditions, such as the interest rate you will likely pay.
Agreement in principle – The lender will outline their loan offer in writing, including details of all relevant charges and any conditions they require you to meet e.g. allowing them to carry out a valuation, providing proof of planning permission.
Site visit – The lender is likely to want to come and meet you and relevant professionals, such as your architect and/or project manner, at the development site.
Valuation – The lender will require a professional surveyor to value the development site in its current state and provide an estimate of likely development costs and the finished project’s likely market value.
Underwriting – The lender will underwrite your loan i.e. make an assessment of the risk involved, in particular the risk of you failing to repay the borrowed funds.
Offer – You will receive a final, formal offer detailing the exact terms of the loan, including all of the costs involved i.e. set-up fees, interest rates etc. You will need to employ a solicitor to check the details of this offer for you.
Completion – Once all relevant legal documents have been checked and signed, the lender will release the funds (or the first instalment of the funds) into your account, allowing you to begin your development.
Find the best deals on property development finance
Clifton Private Finance is an independent mortgage adviser with access to over 60 UK lenders, including specialist property development lenders. Many of these are not available to high street borrowers, meaning we can offer a range of finance options you might not otherwise have access to.
We can help you quickly find the best deals on the money you need to move forward with your development, giving you experienced, independent advice you can trust. Each of our clients works with the same advisor throughout their application, keeping the process simple and hassle-free.
Call us today on 0117 959 5094 or complete our callback request form
Our Development Finance Service
Special features of what we offer include:
- Market leading bridging development finance from £50,000 to £25m
- Rates from 0.44% pm
- Lower rates for £1 million+ finance
- Terms from 3 months to 3 years
- LTVs up to 80% (can be more if other assets in the background)
- Interest roll up options
- Residential (On a regulated basis), buy to let, HMO, investment and commercial properties considered
- Light refurbishment finance (currently uninhabitable, under permitted development rules, require internal refurbishment)
- Heavy refurbishment finance (extensions, basement digs, loft conversions, commercial to residential, barn conversions)
- Bridging finance for business purposes (purchasing land or new premises, deposit for new purchase, business growth)
- Alternative assets considered e.g. pension, investment porfolios, fine art, classic cars
- Automated valuation option for properties under £1m
- We provide a friendly, professional service to help you get the money you need at the best available rates