What is Development Finance?
If you are planning to develop an existing property or start a new development from the ground up, then you will need finance to both purchase the property and complete the construction. This is where development finance is particularly useful.
What is development finance?
Development finance is a category of short-term funding solutions that assist with the construction or refurbishment of both residential and commercial properties. Within the umbrella of ‘development finance’, there are many different options such as loans, mortgages and mezzanine finance.
Rather than a single outright payment to fund a development, development finance projects typically help a developer secure a site. Then, the funds for the development are paid in arrears and released in stages throughout the project until it has been completed.
What kind of properties can development finance be used for?
Development finance can be used for the following:
- Existing property development and conversions
- Ground-up development where there is currently no building
- Knock-down and rebuild
Development loans can be used for residential, commercial and mixed-use projects. Projects can be a single build or multiple units on a single site.
How does development finance work?
Lenders will provide the money to purchase the property or land, offering an initial loan based on the purchase price.
The lender then funds the cost of the development in arrears. When the construction work begins, the client will usually fund the first part (stage) of the costs, and then provide an invoice to the bank surveyor for checks. Once the invoice has been confirmed, the bank will refund the client for that amount.
Releasing the funds in arrears ensures that all the works are completed and the development is finished, meaning it can then be sold and refinanced.
Applying for development finance
Unlike applying for a standard mortgage loan, when applying for development finance, you will need to put together development plans with an architect, a structural engineer and a planning consultant.
Having a team of experts for your development plan ensures that your proposed development is sound, and also increases your likelihood of being approved for development finance.
To ensure your application for development finance has the best chance of being approved, you should use a specialist broker who can access the full market of lenders and find you the best deals. A specialist lender can also review your application and ensure you have all the necessary supporting evidence to make the process much smoother.
Lender requirements for development finance
Each lender will have its own specific requirements but, as a general rule, the following will be required by most:
- A detailed schedule of works to be completed
- A week-by-week timeline for the development plans
- Confirmation of planning permission
- Detailed cash flow information
- Most lenders will only consider projects with borrowing requirements of over £200,000
Development finance repayment
The exit strategy for the development loan is agreed upon at the outset. Repayment will either be funded by the sale of the completed property or by mortgage finance.
If the development is a multi-unit project, developers may use the proceeds from the sale of completed units to part-fund the final stages of other units such as fitting bathrooms and kitchens.
Development finance takes the value of the completed property into consideration, enabling higher value schemes to be undertaken which would be out of budget under normal loan conditions.
The interest payable on the loan is usually rolled up into the total loan amount which is to be repaid at the end of the term, rather than charged on each stage of payment. This means you can keep as much of your own cash as possible for the project until it is finished.
If you need to apply for development finance, then please get in touch with our specialist brokers, and see how we can help.