As a property developer, landlord or investor, there are a lot of finance options out there that you can secure in order to drive forward with your next project. However, if this is the first time you’re venturing into the property development world, it’s likely to feel like a confusing and complex process.
In this article, you’ll learn more about property development finance and how you can secure the funds required to help with any project that you have planned in the upcoming months or years.
What Is Property Development Finance?
Property development finance loans are a type of finance for businesses. It helps fund commercial or residential property projects. From bridging loans to mortgages, term loans, and personal loans, this type of finance is great for large-scale renovation and building projects.
If you’re only just finding your feet in the property development industry, knowing where to start or who to approach is challenging.
How Can I Get Property Development Finance?
There are multiple ways to get property finance. Most will take out a loan if they haven’t already got the capital available to them. This is the most common way to fund your projects, but it’s always important to be wary of borrowing money.
Whilst there may be a high chance you can make your money back to pay off the loan, it isn’t always guaranteed.
Another way to get property finance is by gaining experience. You can do this by joining up with any non-profit business for affordable housing or collaborating with others, whereby you deliver insight and knowledge as an investment.
There are also a lot of private lenders and angel investors out there who might be willing to front the investment if you can provide them with a convincing pitch. Angel investors are those with capital who are looking to invest in a project, not necessarily property development per se, but there are lots of them out there that would.
What paperwork is needed to secure a property development loan?
In order to secure a property development loan, it’s important to know what paperwork is required. Every lender is slightly different in their approach, and what they’re looking for, so it’s always good to double-check what’s required when applying.
Whatever route you decide to take when it comes to finding the funding, you’ll need to provide paperwork as part of the process. Typically this would include but is not limited to:
- A CV and any previous evidence of development projects or experience.
- Drawings and plans of your project(s).
- Details of planning consent and any restrictions that you may have.
- A full breakdown of costs for the development itself, with an estimate of the gross development value of the project.
- A schedule/timeline of the work and the various stages.
- Proof of identity.
- An exit strategy.
Some lenders might not ask for all this; others may ask for more. It’s good to be prepared as it makes you look professional and provides an excellent first impression with your lenders.
How Does Property Development Finance Work?
You may already be familiar with traditional commercial mortgages and how they work. However, for development finance, the process is different.
Development finance involves the lenders accessing the predicted value that the property will have once the project is complete.
To apply for development finance, you’ll be required to submit an application with the relevant information mentioned in the above paperwork section. Based on all the information provided, you’ll receive a list of terms from the lender. Then comes a credit check before the loan is eventually approved.
Types of Property Development Finance Options
There are different types of finance options for property development that are worth knowing more about. That way, you can secure the right type of finance for your project. These business finance options are available for both experienced property developers and those who are brand new to the industry.
The best way to finance your next property development is by using your own money. This is the easiest way to fund a property project and doesn’t have to rely on loans or any other form of financing that isn’t your own.
If you’re able to use your own cash, that should be a priority for sourcing money for property projects.
There are often two routes for a property development project – renovating properties to sell for a profit or buying properties that you’ll rent out. For buying a property to rent, you’ll want to consider buy-to-let mortgages.
Compared to high-street loans, they often come with slightly higher interests and a larger deposit would be needed, as well as paying some additional fees.
Any of those who want to borrow for a BTL mortgage will need to ensure their rental income covers the mortgage repayments and costs like upkeep and taxes.
The other type of mortgage is buy-to-sell, meaning your intentions for the project are to build or renovate the property to then sell on.
Most of these mortgages will tie you in for 2+ years before you’re allowed to sell. For those looking for a quick turnaround, a buy-to-sell mortgage will be required.
These mortgages require higher fees, and you’ll likely need a larger deposit too.
There are a number of bridging loans available when it comes to property finance. These are residential, commercial and bridge-to-let loans.
A residential bridging loan is adaptable where a high-street or commercial mortgage isn’t suitable. They cover a short-term period and are interest-only. Developers use them typically for buying and selling properties through auctions, for example.
They bridge the gap between lending. They’re given on the value of the property, the ability to pay it back or what’s otherwise known as your exit strategy.
Commercial bridging loans are available if 40% of the property’s value comes from commercial purposes. For example, if you are buying a retail unit with a flat above, at least 40% would need to be the commercial unit to apply for this type of loan.
A bridge-to-let loan is used for those who want to buy rental properties. These can be used for both commercial and residential properties, but you must make sure you can achieve 100% rental coverage.
Specialised property loans
With a specialised property loan, you may be able to acquire it from a private source. There are hundreds of these sources to look to when raising business finance on both commercial and residential developments. Individual brokers, for example, are a good example of who to approach.
These specialised loans are handled privately and are still subject to regulations from the financial conduct authority.
Personal loans, otherwise known as unsecured loans, are a fast credit option that means you can make a large purchase. It also means you don’t need to secure any assets as security for the loan. However, they come with lower borrowing limits and higher interest rates than many of the other options above.
How to Repay Your Property Development Loan
When it comes to repaying your development loans, it’ll depend on the lender’s terms and what they require. These include:
Interest Only – You only need to repay the interest that’s accumulated during the project. These are great short-term loans that are most cost-effective than most.
Rolled Up – This type of repayment is where you’ll pay everything back at the end, along with interest as one lump sum. It means no monthly payments will be required, and the developers can focus solely on the work that needs completing.
Development Exit Finance – This allows you to repay development finance before the sale of the project if you require to do so. There’s usually a lower rate involved with this one to help free up capital earlier to fund future property projects.
Property Development Finance Interest Rates & Fees
Interest rates and fees will depend on the lender themselves. Experience as a property developer, the loan amount required and property site location can influence the fees and rates.
Any loans below £500,000, for example, will start around 7.5% per annum for those who are experienced in property development. Rates for newer developers are around 10%+ per annum.
For loans above £500,000, you’re looking at a charge of 5.5% to 8.5% per annum.
It’s always good to look at the market and understand what’s available for you across all lenders. Don’t restrict yourself to just a few, as you could be missing out on some great deals.
What Is an Exit Strategy?
An exit strategy shows the lender how you would pay off the loan. This strategy needs to be the best approach when it comes to maximising your profits and minimising the risks.
An exit strategy is key to swaying your lenders to provide you with the funds required. As a property developer, it’s good to evaluate every possible scenario with the end goal in mind. Have a specific plan and try to tailor it to the lenders personally.
An exit strategy can end up saving you thousands, so it’s worthwhile having this strategy in place.
Can I Get Property Development Finance If I Have Bad Credit?
Just like any type of loan, you should have a good credit score. Bad credit can mean that you’ve got fewer options to choose from. Some lenders won’t offer you loans if you don’t have a good credit score.
However, there’s no reason to be despondent as there will always be lenders who are willing to provide you with a loan. It might just be a higher interest repayment or a limited borrowing power.
The Benefits of Property Development Finance
There are many benefits of property development finance. They can often be repaid quickly, meaning there’s less time being tied into a loan repayment plan.
With this type of finance, there are no limitations on what you can apply for. Of course, it all comes down to certain factors, but you’ve got lots of opportunities out there for borrowing money.
Where eligible, property developers can also benefit from the cost of construction being covered completely by the lender.
Important Factors to Consider Before Applying for a Property Development Loan
It’s important to remember that you need to have all the relevant paperwork when it comes to these loans, and of course, you need to be eligible.
Before applying for this type of loan, consider what lenders will be available depending on your experience. Consider which type of loan is suitable for you and the type of repayments that work best for your financial situation.
Getting a property development loan can be helpful for many in the industry who require funds to kickstart the project or need a cash injection for certain parts of the project.
Can you get 100% development finance?
It is usually not possible to secure 100% development finance.
The only exception may be to secure the loan using your own property or any investment property or land you currently own.
It shows the lender that you’re willing to give up these assets, and it provides them with financial security should the project go south.
However, 100% devolvement finance secured only against the project itself is basically impossible.
How much funding can I get?
It depends on a whole host of factors. However, generally you won’t be able to borrow more than 3/4 or 75% of the build cost of your project.
How fast can I receive a property development loan?
The amount of time it takes to receive a property development loan will depend on various factors.
Firstly, it depends on the lender you go with and secondly how much you’re looking to borrow from them.
There is also the process of applying, delivering any paperwork, and the handover of funds.
Some may only take a matter of weeks, others may want to deliver the loan in instalments that coincide with the timeline of the project.
Will banks lend to property developers?
Yes, some banks are more than happy to help property developers with their projects, providing they have the paperwork and a good exit strategy.
Again, the type of loan made available will depend on what the money is needed for, which can vary from one bank to another.