Everything you need to know about getting a development Finance

Property development can be a lucrative and rewarding venture in the UK. However, it can also be an expensive endeavour, with the typical cost for developing a home ranging from £1,500 – £3,000 per m². Due to this, many aspiring developers struggle to raise sufficient capital to fund their projects.

One solution to address this issue is to obtain a development fininace.

A development fininace is a type of funding specifically designed to support property development projects. It provides developers with the necessary capital to purchase land or property, cover construction costs, and complete the development. The finance can be used for a range of development projects, including residential and commercial properties.

Development finance is a useful tool for UK property developers looking to finance their projects, as providing access to capital can help developers bring their projects to fruition and generate income.

In this blog post, we’ll go into more detail about development finance and how you can secure it.

How does development finance work?

As mentioned earlier, development finance provides funding for building or renovating properties, unlike regular mortgages that are used to purchase existing properties. These loans are based on the projected future value of the property and the total cost of the development.

The loan amount is determined by LTC (loan to cost) and LTGDV (loan to gross development value) ratios, along with the borrower's track record in the industry and their ability to repay the loan.

Also, interest on development loans is usually added to the loan balance instead of being paid monthly, known as capitalisation. This avoids cash flow issues during construction, with total interest paid when the property is sold or refinanced to repay the loan.

What types of development loans are there?

Each type of development loan is customised and not a one-size-fits-all solution. These bespoke loans are created to support various types of property development projects, and their purpose can range from the purchase of land to the renovation and conversion of existing properties.

Here are some common kinds of development loans;

Senior Debt

A first-charge lending option is available for property development, which provides an initial loan and a build facility. This option can allow leverage of up to 75% of total costs and 65% of the gross development value.

Mezzanine Finance

Development finance, similar to a second charge loan, is subordinated to senior debt lending, allowing for maximum borrowing capacity. The loan amount is typically up to 80% of the gross development value (GDV) and has an interest rate of approximately 15-25% per annum.

Stretch Senior Debt

Stretch senior lending is a type of funding similar to senior debt, but with higher leverage. This type of lending is beneficial for developers who have limited funds and want to maximise their return on equity. Stretch senior lending can provide up to 100% of the total costs and 75% of the gross development value.

Heavy & Light Refurbishment Finance

The loans referred to are senior debt loans for established buildings as opposed to those for newly constructed buildings. Due to the perception of lower risk associated with building conversions, lenders can take a more assertive approach in terms of leverage.

What’s the process of getting a development loan?

The development finance or loan process involves several steps, including initial enquiry, submission of a formal application, due diligence by the lender, loan offer and documentation, drawdown of funds, and loan repayment.

To increase the chances of getting a good loan, borrowers should provide the necessary documentation, such as planning permission details, project cost breakdown, borrower's development experience, and exit strategy.

Additionally, finding a good lender for these loans can be difficult if you don’t know where to look. In this case, you should consider asking a professional mortgage broker for help.

Work with a reputed mortgage broker to discover the development finance solution that is right for you

If you're struggling to secure adequate financing for your property development venture and aren't sure where to turn, enlisting the help of a specialist mortgage broker can be a wise move. With their expertise, they can assist you in identifying suitable financeoptions and even facilitate negotiations with lenders on your behalf.

Consider reaching out to a local mortgage broker service to help you with your funding needs.