Financing a new development or major refurbishment works
This form of financing is not for minor renovations to a property or for purchasing land or a new property over a long term but is specific to those involved in the purchase of land or property with the sole purpose of developing the site. If you’re looking for a way to finance any other property-related investment, there are other types of loans or mortgages which might be appropriate.
What you need to apply for a property development loan
Generally, lenders will want to see that the borrower has a good track record and experience in the sort of work they intend to carry out before they will offer the developer finance to complete the project.
That said, even developers with little or no experience can still apply for this type of finance but may need to demonstrate additional security for the lender such as employing professionals, including architects, project managers and professional builders to name but a few, to assist with the job and to reassure the lender that the project is in safe hands. You will also need to demonstrate that you have adequate funds yourself to contribute to the project if required.
You will likely be asked to provide evidence before you can be approved for developer finance, this evidence can include:
- The purchase price of the property, including any stamp duty, legal fees, etc.
- The total expected cost of the build or renovation including a full breakdown of the costs likely to be incurred through the duration of the project.
- The end value you’re expecting from the project (also known as the GDV: Gross Development Value) and the potential yield of the project (for example if you’re building a block of flats to rent out, what will you expect the rental income to be?)
- A contingency plan in case anything goes wrong during the project.
- Drawings or plans of the project and details of what you’re hoping to achieve during the development.
- A timescale in which you expect the work to be completed. This should include any potential delays or contingency plans to be put into place and different stages of work which will be completed.
- Details of any relevant experience you have and the qualifications of your team including their full details.
- Evidence that planning permission has been granted for the project and that any building regulations are being adhered to. This should also include any restrictions, Section 106 requirements or Community Infrastructure Levy restrictions.
- Details on your exit strategy (such as a sale of the property or refinance plans) in case any problems arise during the lifespan of the loan.
What can you get towards your property development?
In general terms, lenders will usually offer development finance options between 70 - 80% of the cost of the project, including the purchase price of the land and construction funds.
This leaves the developer needing to find 20 - 30% of the financing themselves, although security can be offered if multiple properties are owned in the same way a commercial mortgage can be secured against a residential property in lieu of cash if required.
These terms can be modified if the purchase of the land hasn’t taken place yet.
For example, a lender may offer to finance 70% of the purchase price for the plot of land and 100% of the building costs subject to a maximum Loan to GDV between 65-80% depending on lender and the size of the development.
How does repayment work?
Clearly, lenders will only offer a development finance option if they are confident that the project will generate sufficient profit and interim income. They also need to believe in the feasibility of the project: a lender won’t offer funding if they’re not confident they will get it back!
Other types of development finance:
Because we play by the book we want to tell you that...
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances. The fee is up to 1.5%, but a typical fee is 0.3% of the amount borrowed.