Property Development Finance

Once you decide to proceed we are here to help and guide you throughout the application process, with the minimum amount of effort on your part, we will take your calls 24/7 and deal with all of the issues along the way, these range from picking the right valuer dealing with solicitors and correspondence between you and the lender.

We pride ourselves on the fact that we are well known in the industry for our professionalism and ability to get deals over the line when other brokers would not. We often complete on deals that could so very well have fallen down at the last minute, if it were not for our guidance and knowledge. We are also fully regulated by the Financial Conduct Authority.

PROPERTY DEVELOPMENT FINANCE HOW DOES IT WORK?

Property development finance is secured against land or property and is used to develop the land or property and then sell on for a profit, in most cases the development lender will require the site to have planning permission before the work commences.

Property development loans are drawn down as the development works are completed, so you would take a percentage when you first purchase the land or property and then as the works are completed a percentage is drawn down at the various agreed stages of the construction, these amounts are drawn down based on the lender’s surveyors reports. For many developers this sort of finance is often a better alternative to commercial mortgages or buy to let mortgages.

WHO CAN APPLY?

Individuals, Limited liability partnerships, and limited companies are all eligible to apply for development funding. Normally the lender would want each scheme to be placed in an SPV (special purpose vehicle) basically this is a limited company that is formed with the sole purpose of developing a single site. This ring-fences the lender’s security from any other claims that could be made against the site This also offers the borrower the same protection, most developers will have multiple Ltd companies each will own an individual development, once the project is complete and all of the units have been sold, then the companies would be wound up. 

REASONS TO USE PROPERTY DEVELOPMENT LOANS?

Even when property developers have cash they will take out development funding to finance their projects, this allows them to develop more sites with the same amount of equity and as such this, in turn, generates more profit over the long run, the other advantage is that they can develop more than one site in any given location which also spreads the risk should there be a downturn in the market. For shorter term porject they are a more flexible alternative to commercial mortgages.

WHAT TYPES OF PROPERTY CAN A LOAN BE ARRANGED ON?

Funding can be arranged on, residential, commercial property and semi-commercial properties and also land with or without planning permission.  

•          Houses

•          Flats

•          Mixed Schemes Residential & Commercial

•          Commercial  

HOW LONG CAN PROPERTY DEVELOPMENT LOANS BE TAKEN OUT FOR?

This type of property finance is usually taken out for a period of 12 months, on a new build or conversion or for a small light refurbishment loan, it could be as little as 3-6 Months. Only in rare cases will a lender agree for any longer than 18 months. You have to remember that this is when the loan needs to be redeemed from sales, so you will have to factor in the build time and how long it will take you to sell enough properties to pay back the loan.

A typical loan would be for 12 months and most lenders would then agree a 6 month extension if the properties are not all sold after this period, however, they would also want you to pay another arrangement fee for the extra time and they will not offer a further extension, if you have not paid the loan back after the extra time they would expect you to refinance with another lender in order to get the loan off the books

HOW MUCH CAN I BORROW?

If you are doing a small refurbishment it could be as little as £50k, however, this would normally be funded by a bridging loan lender. Specialist finance lenders for property development loans would look for a minimum loan of at least £100,000 with no upper limit, most loans fall into the £200k to £5m range.

HOW CAN I FIND OUT IF I WOULD BE ACCEPTED?

As one of the UK’s leading development finance broker’s our highly experienced consultants will immediately be able to confirm to you what loans would be available in your circumstance and what the applicable terms would be for your project.

HOW MUCH EXPERIENCE DO I NEED TO HAVE?

In order to get a loan from a high street bank, you will need to be an experienced developer and have a number of schemes under your belt before they would accept you for funding. Fortunately, there are also many lenders who will offer to fund loans for people with less experience or even no experience at all, as long as you can demonstrate your ability to tackle the development in a professional manner.

HOW LONG WILL MY APPLICATION TAKE TO COMPLETE?

Basically, we can tell you immediately if you would qualify for funding. If this is acceptable to you we would then get the lender to issue terms which would normally take a couple of days. After you accept the terms both yours and the lender’s solicitors would be instructed and also the lender would appoint a surveyor to carry out a valuation and report on your costs and the viability of the scheme which would normally be turned around in a week.

Assuming the valuation is where you expect it to be the solicitors will then start communication and doing searches etc. This would normally take 4-8 weeks. You should also factor in that property transactions can become very complicated and it would not be at all unusual for a deal to rumble on for as much as six months.

HOW LONG DOES IT TAKE TO RECEIVE THE FUNDS?

On the agreed completion day the lender would send the funds to your solicitors, who would then complete on receipt. This would be the amount towards the land or property you are buying. The drawdowns would then be paid to you as the work progresses and subject to the lender’s surveyor confirming works have been completed up to the value of your drawdown, these would be at either predetermined stages, i.e foundations, wall plate, roof etc, or you could agree to have one draw down per month.

WILL I BE CREDIT CHECKED?

At no time are credit checks carried out without first requesting your permission. But the lender will look at your credit report before issuing a formal offer. Because these loans are secured against property or land you will find that lenders are more relaxed about adverse items.

WHAT IS THE APPLICATION PROCESS?

The process can seem a bit different a typical mortgage application. We have a quick chat with you over the phone to assess if the project is viable and what your experience is, assuming this is all ok we would approach a number of suitable lenders who would offer development finance for your project. We always try to get a quick decision so you know where you stand and once they have looked at the scheme and feel they can offer to fund it they would come back to us with their terms for the loan.

We would then present the head of terms to you and discuss which would be the most appropriate for your development. Once you decide that you want to proceed, we would arrange for a valuer and both parties’ solicitors would be instructed.

ARE THERE ANY UPFRONT FEES?

The first time you would be asked to make any payments would be once you have signed terms with the lender, this would usually be to pay for a valuation, some lenders can also ask for a commitment fee from you to ensure you don’t back out after they have started work on the legal’s etc. You would also be expected to make a commitment to their legal fees.

HOW MUCH ARE DEVELOPMENT LOAN INTEREST RATES?

This is a tricky one as whilst the high street banks tend to mirror each other’s rates and be the cheapest, at the time of writing around 4% pa, they are also extremely fussy about who they lend too and you will need a strong track record of similar schemes you have completed and sold over a number of years to be considered for this type of property finance. Specialist lenders are far more flexible in who they deal with and also the rates they offer, typically they range from 5%-12% pa. Although the rate they actually offer you will depend on what the project is, location, loan amount and how much experience you have.

CAN A DEVELOPMENT LOAN BE PAID BACK EARLY?

You can repay at any time during the loan period, however, some lenders will have early redemption charges, whilst it is great for you to be clearing the loan early for them they only make money whilst the loan is outstanding.

HOW MUCH ARE VALUATION COSTS?

This is the cost for the surveyor to firstly check that the site is worth what you are paying for it and then to go through the viability of the scheme based on your costs. These are normally around £250 per £100,000 so a £300k site would cost £750 in addition to this the funder would instruct a quantity surveyor to go through your appraisal to make sure everything is viable, you should factor in a minimum of £1,000 for this and on larger schemes, it could be substantially more. You can usually ask the bank to get you some quotes so that you can pick which one you would like to use.

HOW MUCH ARE SOLICITORS’ COSTS?

When you take a Development loan, you are expected to pay not only your own solicitors fees but also the cost of the funders solicitor, these are agreed in advance and can be anything from £500 on a small loan but can be substantially more for large complex loans, solicitors costs are also aligned with the value of the loan. Note you would also be expected to put the lender’s solicitor in funds before they start work or get your solicitor to give them an undertaking to cover your legal costs, this in effect means your solicitor is guaranteeing their fees on your behalf.

WHAT ARE ARRANGEMENT FEES?

Development loan arrangement fees are agreed between the bank and the borrower, they are usually 1-2% of the agreed development loan amount and usually payable when you make the first drawdown. These fees cover the broker’s fee and all of the work that goes into arranging the loan before it has been drawn down.

WHAT ARE DEVELOPMENT EXIT FEES?

Some property funding comes with exit fees, this is usually 1-2% of the loan or some lenders charge it on the GDV (Gross Development Value) obviously it is a lot more expensive if it is based on the GDV rather than the actual loan amount.

HOW IS DEVELOPMENT FINANCE INTEREST CHARGED?

The way interest is charged differs from residential mortgages. Lenders usually charge interest on a daily basis, so if your loan lasted 6 months and 5 days that is the amount of interest you would pay. The interest is also paid when the loan is redeemed so you would not pay it on a monthly basis, it would be paid back out of your property sales at the point you pay the loan back.

Note some lenders charge what they call a non-utilisation fee, this basically means you pay a percentage of interest on the amount of money you do not drawdown. The reasons for this are that the lender will have put aside the amount of the loan agreed with you so that the funds are guaranteed for your development, if the funds are not drawn down then the bank is not earning anything on the cash.

HOW IS INTEREST PAID?

Your interest is paid at the end of the loan period so you do not have to worry about making monthly payments as you develop the site, the lender will simply calculate the number of days and amounts owing for that time period and deduct it from the sales proceeds.

WHAT LOAN TO VALUE CAN I GET?

Development finance is agreed at certain loan to values, these vary with each funder, as a rule of thumb high street banks will not go beyond 65% loan to value and some want you to put all of your cash in first which rather defeats the point of taking finance. However, most specialist lenders will let you put it in at the end.

Generally speaking the higher the loan to value the more you will pay in interest and the lower the loan to value the lower your interest will be. In some cases, you can get 100% loan to value but the finance company will be looking to take half your profit in fees and interest. Typically loans can go up to 70% of GDV which usually works out to be around 90% of costs so you would be putting 10% into your development.

WHAT ABOUT BAD CREDIT DEVELOPMENT FUNDING?

Most development lenders are quite happy to take on a property loan with someone who has had bad credit or CCJS registered against them, although they will insist the arrears are paid off. Obviously, the fact that they have security against the land or property gives them more security that if it was a personal loan.

WHAT IF I CANNOT PAY THE LOAN BACK AFTER THE AGREED TIME?

When you take out property development finance it will be for an agreed term usually 6-12 months from the date you first make a draw down on the loan. After this term has expired you will be expected to have developed your site and sold the properties in order to repay the finance. With the best will in the world this is always going to be tight unless you get sales during the time you are developing the site, however almost all development finance lenders will agree a further 6 month extension in order for you to get the properties sold, although they will also look to you for an additional arrangement fee to cover this extra facility. after this six months has expired you would need to refinance with a bridging loan if you still needed funding.

IS PROPERTY DEVELOPMENT FINANCE REGULATED BY THE FCA?

Generally speaking no Development funding for property development is not FCA regulated, however, if you intend to live in the finished property or any part of it then the loan would be FCA regulated as if you were taking out a personal mortgage on it. However, nearly all the loans we arrange are for property developers whose sole intention is to sell the property and move on to the next deal. Top 10 Finance are regulated by the Financial Conduct Authority, so we are able to help, whatever your requirements.

WHAT ARE THE TERMS OF A DEVELOPMENT LOAN?

The terms of your development loan will be outlined and ahead of terms to be given to you before you enter into an agreement with the bank. These will typically include the Interest rate payable, any arrangement and exit fees and any plot release fees. It will also give you the length of the loan and any other requirements that the lender should wish to include in the offer.