Financing your project

Whether you’re building a new property, renovating an old one or extending a small one, you need to have a way of financing the project. You might be a developer, a landlord or just an investor, but whatever reason you have for seeking property development finance, there are a number of options available to you.

Type of work

Funding is available for a wide variety of different types of project. Light refurbishment work may be all that is needed; this is usually where changes are cosmetic rather than structural, although it can involve changes to the internal walls and layout of the building.

A heavy renovation or refurbishment of an existing property will usually involve more work such as rebuilding external walls, adding an extension or modifying structural internal walls. It can also involve large scale plumbing and electrical work such as adding or relocating a bathroom or a complete rewire of the property.

At the top of the scale is a ground up development, starting with just a piece of land, a recently demolished building, or an old property that is merely a shell with only the masonry intact. Definitions of work vary somewhat; one developer’s light refurb might be another’s major project, so it’s important to be clear as to what you want to achieve and what work this will involve. Professionals such as architects can help you translate your vision into a practical project.

Types of loan

You might need an initial loan to buy an existing property or a piece of land on which to build. This would usually be in the form of a commercial mortgage or perhaps a buy-to-let mortgage. If you are buying a property at auction, there are lenders that specialise in this type of finance too.

When it comes to carrying out building work or renovations, you’ll need development finance. This is intended to finance building costs over a relatively short period - usually between three months and two years - but it can often be converted into a mortgage at a later date.

You may find that lenders will be willing to finance a proportion of the purchase price and a proportion of the build, so you would only need to find a part of the costs yourself.

How much can you borrow?

With property development finance, it’s unusual to be able to borrow all of the cost of a project. Loans are usually based on the gross development value (GDV) of the project - that is to say, the total value of the property once the build is complete. Loans will usually be a maximum of 60 per cent of GDV or 75 per cent of the total project cost.

Development finance lenders usually allow for the loan to be drawn down in stages as the project progresses. It’s also the case that the developer’s own contribution will be the first to be used with the loan kicking in afterwards. The drawdown of loan funds will usually be on the basis of completion certificates provided by the project architects.

As an example of how this might work, a development with a GDV of £4 million might cost £1.5 million for land and another £1.5 million for development, making a total of £3 million. A lender, therefore, might be willing to lend £2.25 million in total which is 75 per cent of the development cost.

Where the developer already owns the land outright, it can be possible to get a property development mortgage for 100 per cent of the development costs.

Length of loan

Property development loans are typically short term, generally between six months and 18 months. They are also usually interest only, with the capital repayable only at the end of the term when the development has been completed.

It can be possible to roll the interest payments up in the loan. This means that no repayments are necessary during the loan term; you simply repay the whole lot at the end.

Before you start to look for developer finance it’s a good idea to have the project in place with planning permissions agreed so that you are prepared to commence quickly once the loan is agreed. This reduces the risk that you will be paying interest on a loan before the project has commenced.

Loan rates

The amount of interest you can expect to pay on a developer loan varies. It’s therefore important to talk to an experienced broker who can access lenders from across the market. Our mortgage advisors have access to a wide range of loans from across the market place so they are able to find you the most competitive rates for your development.

We will do our best to match you with the right lender for your project. In order to do so there are some key pieces of information it’s useful for you to have to hand before you contact us:

  • What is the total cost of the project?
  • How is this split between purchase and development?
  • What is the estimated GDV on completion?
  • How soon do you need the loan?
  • How long do you need it for?
  • Do you already own the site or property?
  • What planning permission do you need / do you have it already?
  • Has building work already commenced?
  • How long is the work going to take?
  • Do you have previous property development experience?
Having the answers to all of these questions will help to streamline the process and ensure that we understand your requirements. The key to successful property development is good planning. That applies to arranging finance just as much as it applies to finding the right property and arranging the work. We're here to help.

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.

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