Development Finance is designed to fund property developments, it is a loan for a portion of the purchase price and build cost of a given project.
Most people have never heard of Development Finance. This kind of funding has been historically hard to access, with minimum loan amounts of £1m and above available only for experienced Developers. In the recent period, we have seen some Lenders start to compete in the £500k-£1m range, and there is even now a handful who will deal with cases below the half-million mark.
When you get a mortgage, you are borrowing against the value of a property in its current condition. For example, if you had a house worth £100k, you may lend £75k against it. If things go wrong, the Lender has a charge on that property and can repossess it. Development Finance is different; this loan is based on both what property the property is worth now and what it will be worth once it has been built/refurbished. This means you can lend both money for the purchase and up to 100% of the build costs. Lenders will lend in two portions or ‘tranches’:
The Development Finance world is quite different to other areas of property finance. Buy to Let mortgages may have standard products and criteria, in Development Finance each deal is bespoke, and manually assessed based on its merits and overall risk profile.
Experience is very important. The Lender needs to feel comfortable that you can turn the property from what it is now into the completed development. A good professional team, clean credit history and a strong asset balance all help. Most lenders will ask that you have completed several projects before. However, you can now access finance as a first-time developer.
Another major consideration is your proposed exit, Development Finance is a short-term solution to get the property built. Once finished the Lender will want to know you can either sell or remortgage onto a Buy to Let.
Every Development deal is bespoke; the cost and kind of fees charged by the Lender can vary from case to case. The standard fees charged are:
What other Items should I budget for?
There can be a variety of costs depending on the development, architects, environmental reports, project managers. The devil is in the detail - each site is different.
As Development Finance is bespoke, the process and timescales can vary from case to chase. However, there are generally a few key stages:
The valuation of development finance cases is a key part of the process. The valuer will give their opinion of three main figures:
It is important to have fully researched these figures, a difference of opinion at this stage can change the risk profile of the case. Some lenders will change their quoted interest rates if the valuer’s opinion differs significantly from your own.
There are a few key ratios which are used to assess the case and give a general indication of risk profile.
The language used in this area of finance is different to other areas of finance. There are a few terms to get used to:
Development Finance vs Self-Build
You may have heard of Self-Build Mortgages. Self-builds are for people building their homes, whereas Development Finance is designed for business projects motivated by profit. Self Build mortgages are regulated, whereas development finance is unregulated and generally more flexible. Here is a summary of the differences:
Planning & communication
Developments are some of the most complex property transactions you can be involved in. Planning your build, allowing for contingencies and clear communication are all very important. Seemingly small details can have an impact; you can never overprepare or over-communicate.
Every development is different; if you would like to understand your options, the best thing would be to give us a call.
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The guidance and/or advice contained within this website is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK. Not all products and services mentioned are regulated by the Financial Conduct Authority. Your home may be repossessed if you not keep up repayments on your mortgage or secured debt