Guide to development finance

Developing dreams

No industry stands on the cusp of as much opportunity as the development sector right now. The housing crisis rumbles on; discussions persist on where developers of all sizes are going to access finance with government funding schemes currently falling short of the mark. At Finance 4 Business, we’ve recognised this potential, and we’ve aligned ourselves with some of the most innovative lenders in the game – meaning we can satisfy all of your development finance needs.

What is development finance?

Property development finance is a short-term loan which is used to fund the purchase of land and cost of construction for major building projects (as well as to renovate or convert existing buildings) and can be used for residential, commercial or mixed-use properties.

It’s especially popular amongst developers or investors who wish to increase the market value of a property or to rent to businesses or residential tenants and offers a wide range of different finance options to facilitate chosen outcomes. ‘Refurbishment’ loans, for example, can be used to fund building costs for both ‘light’ and ‘heavy’ refurbishment projects (typically for a period of between three and 24 months) and can often be converted into a mortgage at a later point, while ‘development’ options are used for extensive or ‘ground-up’ constructions, with lenders financing a percentage amount of the land purchase and building process.

Why would I use it?

Development finance options offer investors the opportunity to fast-track projects and help with cashflow without tying up their own funds. The loans are commonly used for the provision of constructing new buildings or converting & refurbishing existing units, predominantly for residential purchases.
These loans are planned around individual projects, with interim payments being released against agreed building progress.

How much can I borrow?

Loans are calculated by working out the future worth (or ‘gross development value’) of the property once it has been entirely renovated or fully built, together with the costs that are generated by the purchase of the land (or existing property) and the price of construction (with everything, from materials and legal fees to architects, surveyors and labour costs, considered). As a rule of thumb, however, most lenders will allow developers to borrow up to 100% of the build cost and around 50% of the cost of the land purchase, with loans typically ranging from £50,000 to £250 million (depending, of course, on the size of the project).

Is it expensive?

Interest rates will (inevitably) differ from lender to lender and can be affected by a number of different factors mainly being the experience of the developer and the LTV they’re looking to achieve. However, typical rates tend to start at around 6.5% P/A for smaller loans and between 4.5% and 9% P/A for loans above £500,000.

How is it different from bridging?

Although bridging loans and development finance loans are often regarded by borrowers as being similar, there are actually some notable differences. Bridging loans are generally used as a more short-term option and are secured against the property or land on which construction is set to begin. They are often used by developers to secure longer-term finance, pay off up-coming debts, drive up the value of the land/property or to achieve maximum prices at sale. Furthermore, LTV’s are calculated according to the value of the security (as opposed to the GDV or future value).

Where can I access development finance?

At Finance 4 Business, our award-winning finance team are experts in development finance. We can help you to realise your development dreams whether that be a Grand Designs-esque self-build, small residential development or even a major project. We partner with the most dynamic and exciting lenders in the field and can guarantee you’ll receive a product matched only in quality by our service. After all, broking is the new banking.