As the name suggests, development finance is a financial loan provided to an individual or business to develop or redevelop property. For example, building an extension on a residential property or creating new office space within a commercial property. It can help you turn a development project into a dream home or profitable investment.
Although large loans are available, some up to £100 million, property development loans are segmented into phases and drawn down as the project progresses.
Lenders offering development finance want to ensure that the money will be paid back in full and on time, therefore it’s important that an exit strategy is in place. For example, this may be the sale of the property, which is a common solution we see from our clients. Make sure you have thought about this in advance – lenders will always ask!
Curious to see property development finance in action? Take a look at how we helped a first time landlord broaden his portfolio.
If you’re looking for property development finance, or have a project you want to discuss with our qualified brokers call us on 020 7220 5100 or contact us via our online form.
At Coreco Commercial we specialise in development loans and other commercial finance and therefore we have been able to secure high-value property development loans at competitive interest rates. This is possible thanks to our ability to work with a wide range of specialist lenders, including private banks, and we understand what lenders want to see when reviewing high-value property development loans.
At Coreco Commercial we deal with lenders that offer property development finance up to and in excess of £100 million.
While there are a number of different mortgage and loan products that can be used to refurbish or enhance your property, property development finance is specifically designed for new build developments and larger-scale conversions.
The main differences between commercial mortgages and development finance are:
Property development finance durations tend to be much shorter than commercial mortgages, typically ranging from 3 months to 3 years. Whereas commercial mortgages can run from 3 to 30 years.
An essential requirement for development finance is the exit strategy. Due to the short-term nature of development finance, you’ll need to show potential lenders that you have a realistic plan to pay back your property development finance. Usual exit strategies include:
For those with smaller development ambitions such as buying a property, carrying out renovations and then selling it for a profit, buy-to-sell mortgages can be a more attractive option. These smaller renovations can include:
Buy-to-sell mortgages are closely related to bridging loans as they are for short durations, typically up to 12 months, can be secured relatively quickly and tend to be used on properties which are currently uninhabitable/unletable.
As with bridging loans, buy-to-sell mortgages require you to have a realistic exit strategy once your buy-to-sell mortgage product comes to an end. This can include refinancing the property to a buy-to-let or a residential mortgage, or you can sell the property to pay off the buy-to-sell mortgage, keeping any profits.
If you’re not sure whether a buy-to-sell mortgage or a property development finance is the right option for you, get in touch with our experts who can help you decide on the right product for you.
There are three common types of development; light development, heavy development and ground-up development. Different lenders will have slightly different definitions of what constitutes light, heavy and ground-up developments. Typically they fall into the following definitions:
This is mainly aesthetic rather than structural changes to the building. For example, this could include a new kitchen, bathroom, modernising a property or making it more energy efficient. Light refurbishment typically doesn’t require planning permission and can be done under permitted development rules.
This type of refurbishment covers structural changes and more in-depth refurbishment. This can include new plumbing and electrics, moving internal walls as well as extensions, attic conversions and converting a property from commercial to residential.
Ground-up development is exactly as it sounds, it’s building a new structure on either undeveloped greenfield land or partially developed brownfield areas. These are some of the bigger developments where finance can be required to purchase the land as well as fund the building costs themselves.
When approaching lenders for light or heavy refurbishment, depending on the cost of the refurbishment and the value of the building, you’ll be able to borrow the total costs of work value needed for your project. As with a typical residential mortgage, you’ll pay the full gross loan amount with interest over the agreed term.
With ground-up development, you’ll typically borrow a portion of the land value and 100% of the building costs. Interest payments can be ‘rolled up’ into the loan itself as lenders understand that during the construction phase, there won’t be an income with which to pay the interest. Once the development has been completed you will then need to repay the loan in full including the interest that was rolled up. This is typically done by selling the development and keeping the profit, however, if you plan to live or work in the property, you can pay off the development loan by refinancing the property with a residential, buy to let or commercial mortgage.
Development finance is typically a short-term finance project due to the fact that this is a temporary form of finance. When conducting light or heavy development on a residential building where you already live, you can remortgage the property to repay the property development loan. As long as you have equity in the property or the development that you’re carrying out adds value to the property, there shouldn’t be any issues with remortgaging. It’s worth bearing in mind that if you remortgage there may be early repayment fees to factor in.
If you’re conducting a ground-up development then there are a couple of popular choices to repay the development finance. The first is to sell the property you’ve built and use the proceeds from the sale to repay the development finance. You can then keep any leftover cash as profit from the sale. The second option is to take out a longer-term financial product such as a buy-to-let mortgage if you plan on renting the property.
At Coreco Commercial we have secured development finance terms for as long as 36 months for ground-up developments.
When applying for development finance you’ll need to show the lender how you intend to pay back the loan. There are multiple ways that you can pay back your development finance and some of the most common are:
While it’s no surprise lenders may be more inclined to provide competitive loans to experienced property developers, it’s not always the case. There are a number of alternative lenders in the market who will consider first time developers as everyone has to start somewhere. However, regardless of your experience, here are two top tips that we think are well received by lenders:
Ensure you have done the maths correctly and the project is viable with evidence to justify the costs and profits. If you do not have the relevant experience, instruct a project manager or professional team to oversee the development project to make certain works run smoothly.
Contact our team of property development brokers if you’re unsure about whether you would qualify for development finance. Our specialist team are on hand to talk through your project and may be able to suggest alternative finance if required.
Property development finance is accessible to the majority of business structures including:
When it comes to development finance people often ask us whether they need planning permission before applying for finance. The answer to this isn’t as simple as yes or no. While for some lenders it’s a requirement to have planning permission before applying for the loan, others are happy to lend without planning permission in place and others will give you an agreement in principle (AIP) on the basis that planning permission is granted.
For some light and heavy development, you may not need planning permission as these are internal, aesthetic changes and some development may be allowed under permitted development.
We find that lenders are much more likely to lend to you if you have planning permission in place. It’s definitely worth exploring what level of planning you need and showing your findings to lenders before applying for development finance.
With development finance, there are some additional fees to be aware of and you’ll need to budget for including valuation fees, solicitor fees and monitoring surveyor fees.
Valuation fees are required by the lender and require a surveyor to value the development site, determine the cost of development, how long it will take to complete and the final value of the development once completed. The cost for this will depend on the size of your development.
Development lenders will typically require you to cover any legal fees incurred by your application. As each application is different in size and complexity it may be worth discussing what this may cost with a solicitor before applying for development finance.
During the course of your development project lenders will send out a surveyor to check on the progress of your project. This is usually a key part in gaining access to the next tranche of funding you require, similar to what we see with self-build mortgages. These monitoring fees are usually paid by the developer as part of the finance package and these costs vary with each lender and project.
Depending on the project, there are many types of development finance available. They’re suitable for:
In some instances, development finance can also be used in the early stages of the project. For example, to finance the land/site purchase and also the build costs.
While it’s no surprise lenders may be more inclined to provide competitive loans to experienced property developers, it’s not always the case. There are a number of alternative lenders in the market who will consider first time developers. However, regardless of your experience, here are two top tips that we think are well received by lenders:
Contact our team of property development brokers if you’re unsure about whether you would qualify for development finance. Our specialist team are on hand to talk through your project and may be able to suggest alternative finance if required.
Property development finance terms are the pre-agreed length of time the loan is secured for. The term of the loan is determined by the time to build and exit the finance. Typically, the term is up to 24 months but for larger, more complex projects, 36 months may be appropriate.
For the loans themselves, they are often arranged on a monthly interest only basis which is paid in full at the end of the term. Sometimes the lender will require the loan to be serviced upon execution of the exit strategy, however this is less common.
Typical interest rates for property development finance are very broad. The overall stack of finance can vary significantly and is determined by the project itself, namely the size and type.
However, in order to achieve the most suitable rate for your project it’s important to discuss your options with a member of our specialist development team. As experienced advisers in property development finance, our team are on hand to suggest which lenders may present you with the most relevant terms.
Your home may be repossessed if you do not keep up repayments on a mortgage or any debt secured upon it.
There is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage.
A percentage of the mortgage amount may be charged depending on individual circumstances. A typical fee is 1%.
Coreco Commercial is a trading style of Coreco Specialist Finance. Coreco Specialist Finance. Registered Office: 117-119 Houndsditch, London EC3A 7BT. Registered in England Number: 06851546
Coreco Specialist Finance Limited is authorised and regulated by the Financial Conduct Authority.
Some types of finance offered by Coreco Commercial are not regulated. Please contact us for more details.
Coreco Commercial advisers are experienced mortgage advisers but we are not tax advisers. Please seek independent tax advice if required before you decide to proceed.
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