When embarking on a property development or construction project, you need the right funds in place at the right time. Property development finance provides a short-term funding solution to cover the purchase and build costs of your residential or commercial project.
What is property development finance?
Property development finance is a short-term loan that is typically taken out for 6 months to 2 years. The loan term can vary significantly from this, however, depending on your project size and the lender´s terms. You can use it for the purchase costs (including land) and build costs of your project, whether that´s for a single unit or multiple units.
This type of loan offers flexibility in its use, being suitable for residential, commercial and mixed-use development projects. As well as building property from the ground up, it can be used for restorations, conversions and refurbishments. It differs from a traditional loan in that the payments are made to you in stages throughout your project.
How does property development finance work?
As mentioned above, the funds are released to you in stages throughout your project rather than in a lump sum. These key development stages are pre-agreed with the lender who usually carries out periodic inspections prior to making each payment. These funding stages help to mitigate the risk for you and the lender, ensuring that your project remains on track.
Interest rates tend to be higher for development finance than other types of funding. However, interest is only charged on the funds you draw rather than on unused funds that are held in the drawdown facility. It is usually rolled up so that you can repay it when you repay your loan rather than having to make monthly instalments. This helps with your cash flow while your project is in progress.
You need to provide the lender with an exit strategy before they will approve your property development finance loan. This is how you intend to repay the loan. The three main ways to do this are to:
- Sell your finished development
- Refinance to a long-term loan, such as a residential, commercial or buy-to-let mortgage
- Use development exit finance
What are the main uses of property development finance?
Property development finance is versatile in its uses. As every development project is unique, lenders offer bespoke funding solutions to meet each project´s needs. The main uses for this type of funding include:
- Buying the land to build on
- Constructing a new property
- Converting, renovating or refurbishing an existing property
- Covering infrastructure costs
- Covering professional fees, such as legal costs and planning fees
- Providing working capital during your project
- Covering the costs of selling your development
The pros and cons of property development finance
Development finance is more complex than other loan types and has both pros and cons to consider, as detailed below.
Pros
There are many advantages to using this type of funding:
- It enables you to embark on a bigger project than you´d otherwise be able to.
- You can tackle multiple projects simultaneously.
- Numerous types of development finance are available, being suitable for various project types, levels of complexity and scale.
- First-time developers and inexperienced developers can apply for a loan, not just those with extensive experience.
- The development finance facility is tailored to the project, offering essential flexibility.
- You can maintain your cash flow throughout the project as the funds are released in stages.
- As a short-term loan, you won´t have to make substantial repayments over many years.
- A new development project can get underway before an existing one is sold.
- You don´t have to tie up a large amount of cash in the project. This ensures your cash flow is maintained throughout the project and you have funds to hand if you wish to invest elsewhere in the meantime.
- As less capital is invested into the project, your return on investment (ROI) increases.
Cons
There are some disadvantages to consider too:
- The interest charged tends to be higher than for other loan types due to the increased risk for the lender.
- Lenders require a considerable amount of information for a development finance application, making it a more complex process than for other loan applications.
- Fees are payable for development finance and these differ depending on the project undertaken.
- Various risks can be encountered with development projects, such as delays, an overrun on costs and property market fluctuations. As such, a contingency fund needs to be in place.
Benefit from the flexibility of property development finance
When you´re ready to tackle a residential or commercial development project, we can arrange your property development finance. Flexible in its uses, your loan will be tailored to meet the needs of your unique project. We work closely with specialist lenders who handle applications on a case-by-case basis. This means that you´ll receive a bespoke funding solution to meet the complexity of your project or situation. Whether you´re a new or experienced developer, just give us a call on 01322 907 000 to get your property development finance application underway.