What is a Development Finance Loan?
Development finance is a short-term loan used to pay towards the costs a property development. Available for both commercial and residential properties, development finance can be used towards building, converting, and renovating property.
There are often restrictions with property development loans such as these. For instance, it’s a loan mostly reserved for large-scale property development projects rather than smaller home-projects such as a renovating a single property – these are covered by bridging loans and refurbishment finance loans.
Why Use a Development Finance Loan?
Development funding is essential for anyone that wants to become involved in property development, unless they have large sums of money on hand!
While a very alluring industry, property development is far from easy, with securing finance being the biggest challenge. After all, paying to build, renovate, or redevelop property requires large finances, so those that lack sufficient funding may struggle to develop projects.
So, securing a development finance loan is one of the main ways to finance such a project. The idea behind these development mortgages is that the loan is short-term, with loan recipients paying back the sum based on their profits generated from the property.
However, securing a property development finance loan is far from simple. Industry experience is preferred by most lenders, while it’s impossible secure development funding without planning permission, full breakdown costs, building regulations, land titles, and expected end value of the completed project
Understanding Development Finance Loans
Property development finance isn’t the easiest to secure, which makes sense given the high costs of financing such projects and the inherent risks they present. Not everyone will be accepted for a such a loan, and those that do have a lot to think about.
Rates – Development finance comes with no fixed rates, meaning it could cost anything to take the loan. Rates vary from each provider and are based on other factors such as the strength of the project, what is being purchased (e.g. land or property), project costs etc.
Loan Amount – Again, this varies from each provider, but the nature of property development loans means they tend to be quite high. Remember, the loan amount covers a certain percentage of the total costs, such 75% cost of the total project with 100% build costs. Still, loan values are very high, reaching upwards of £100,000 in most cases.
Loan Length – Property development loans are usually short-term, based around the length of the development project. The average loan length ranges from 6 to 18 months, with the size and scope of the development impacting how long the loan is for.
Loan Requirements – property development history is certainly helpful for securing a loan, but not always necessary. In many cases, working with reputable builders, architects and other developers may be enough. Planning permission is a must, while a comprehensive breakdown of the project will be needed.