19 Apr

In June 2020 Prime Minister Boris Johnson announced major reforms to the UK’s planning system. These reforms give greater freedom for buildings and land development without planning permission. This creates a great opportunity for property developers with cash in the bank. But what about the rest of us without a financial surplus to invest? 


What Is Development Finance? 

Development Finance is a short term secured loan, used to fund the purchase and build costs associated with a residential or commercial property. These include new builds, conversions and refurbishment projects. The borrowing term of a development loan is normally between 3 and 24 months, depending on the lender. 

How Does Development Funding Work? 

Development Funding has two parts: The first part of the funding is used to purchase the land or an existing property. The second part is used to pay for the build costs, which is normally funded in stages, as the project progresses. Depending on the developer’s experience and the level of build cost, this may be subject to an independent monitoring surveyor signing off the work. Also, keep in mind that the second part of the loan is funded in arrears. 

How Much Can I Borrow? 

The amount you can borrow depends on three key factors: Current value of the property before refurbishment or value of land. Build costs and the value of the completed property, once all the works are complete - known as Gross Development Value, or GDV. Each lender has its own parameters but most commonly you can borrow up to 75% of current value and up to 100% of the build cost

How Much Does It Cost? 

A development finance lender will charge interest rate normally quoted as a monthly rate, since this is a short term finance and can be repaid at any time. Rates are typically between 0.3% and 1.5% per month. And they are payable in either one of three ways: Monthly payments; Deferred to the end of the term; Retained, meaning taken from the advance at the start of the loan. With some lenders, you can combine these three options. What Are The Fees? In addition to the interest charged on the borrowed amount, there are fees which you will need to pay. These include arrangement fee, normally between 1% and 2%, administration fee, valuation fee, legal fees, broker fees and with some lenders, an exit fee or an early repayment charge. If the lender requires you to have an independent monitoring surveyor, then you’ll also incur fee costs. 

Exit Strategy 

When taking a development loan, you need clear exit strategy, most commonly are sale of property or refinance to a term loan. This is vital to avoid hassle when the development loan comes to an end. 

Pros of Development Finance? 

It is very important to understand the pros and cons of any financial product you are considering. Some of the pros of development finance are ability to raise capital for the build costs, fast access to cash, and it can be used to pay for contractors and materials. 

Cons of Development Finance 

Some of the cons of development finance include high cost of borrowing, security against your property. Also, you may be required to contribute a large sum at the start, since interest may be retained from the advance and the build costs are funded in arrears. 

Development Finance Key Facts: 

  • Short term secured loan for purchase and build cost
  • Build cost is funded in staged drawdowns
  • Cost of finance can be high
  • Can provide quick access to cash
  • You need clear exit strategy

Are you an experienced property developer or someone who is looking to start a project and are looking for guidance and funding? We work with developers, both experienced and start-ups, helping them get funding for property and land projects. We can help you find a product that suits your needs and guide you through the lending process.

* The email will not be published on the website.