24 Oct 2022
The property development finance market can feel overwhelming, but knowing some fundamentals can help you to navigate it. At Funding Options, we’re here to help guide you through the funding process – from application to funds released. Here’s what you need to know about property development finance.
Property development finance is used by developers, businesses, partnerships and Special Purpose Vehicles Companies (limited companies which are created for buying property and property management), to fund the building or refurbishment of property.
It can be used for a range of property types, including:
Residential flats and houses
The majority of property development loans are short-term and last for the duration of the project. Terms can still vary from a few months to several years, depending on the scale.
Typically, development finance is released in tranches in line with each stage of the development. As such, regular site inspections are required to assess the project’s progress.
As a property developer, your exit strategy is a key part of the application process, and the loan usually has to be repaid when the project comes to an end.
There are a number of ways to do this, including by:
Selling the property and using the funds to repay the loan, keeping the rest as profit
Refinancing the loan using exit finance while you wait for the sale to go through
Using a buy-to-let, commercial or residential mortgage to repay the finance
When it comes to development finance, every applicant is considered on an individual basis.
The amount you’re eligible for will depend on a number of factors, including how much you need upfront, the loan to cost ratio and the loan to GDV value, which is the loan amount as a proportion of the anticipated property value upon completion.
One of the main costs involved with property development finance is the interest. The rate of interest you’ll pay will depend on the type of property finance you take out and your business’ circumstances.
Interest on development finance is usually ‘rolled up’, meaning you pay it alongside the original amount borrowed at the end of the loan term. There are instances where you might be asked to make regular payments, and you may even decide to make voluntary payments if you have the money and would like to reduce the final repayable amount.
It’s important to factor in all the loan costs and how they will impact your profit margin. As well as interest, here are the other fees you may have to account for:
Monitoring surveyor fees
Even if you’re new to property development, you may still be able to get finance. Here are a few tips to keep in mind if you’re just starting out in the property development industry.
Understand your finances – You need to make sure you can make a profit and be able to demonstrate your calculations to the lender. Research the market thoroughly and don’t exceed the amount you’ve budgeted for when buying a property or site.
Get a great team together – As with anything in business, you should try to surround yourself with reliable and experienced people. The professionals you’ll be working with include contractors, surveyors, solicitors, estate agents and architects, and they can add credibility to your application for finance.
Research customer demand – Is there an appetite amongst potential buyers for the type of property you’re developing? Will this be the same by the time the development is complete? Understanding buyer demand is key when it comes to making sure you can sell your property at the projected sale price.
Check out the competition – Is there a similar project to yours happening? If so, it could have an impact on your exit strategy, which is why it’s so important to identify other schemes and planning applications before you embark on your funding journey. Demonstrating your understanding of the competition can also help your lender when they assess your application, and indicate that you’ve considered the risks.
Understand your development site – Don’t get caught out. Take the time to understand every part of your building site: not least of all drains and utilities. For example, if your site has drains where the foundations will be, you will have to factor in the costs associated with repositioning pipes. Your plans and surveys should highlight areas where you could encounter extra costs. (Your finance application is likely to get rejected without these considerations.)
If you’re a property developer, investor, or landlord, there’s a range of finance available to help you kickstart your next project. But the property lending market can feel large and complex, even for experienced developers. We’re here to help you navigate it.
Use Funding Options to compare your property finance options and see what you could be eligible for. We cover loan options ranging from £1000 up to £15m, it’s free to apply and it doesn’t affect your credit score. You’ll also benefit from expert help throughout the process.Get started
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