Development Finance
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Development Finance
We find out all about development finance with Adam Messer, who answers some frequently asked questions.
What is property development finance and how does it work?
If you want to build a property for you to live in, you would tend to do a self-build mortgage – which we can do as well – but that is a separate thing from this.
Development finance is more of a commercial product. It’s aimed at property developers – people who want to build something to either rent out or sell. They’re not going to live in it themselves.
The most common scenario is where you buy some land and build some property on it. If the land you’re buying has planning permission we can go straight in with development finance.
If it hasn’t got planning, and you’ve taken a gamble on getting that, we probably need to take a bridging loan first on the land and then get planning. With planning permission, the value of the land goes up. We can then use development finance to pay off the bridging loan and then fund the construction work.
You can also take development finance if you’re doing some sort of conversion – a barn, for example. I’ve helped people convert offices and commercial premises into flats. Again it depends where planning fits in, but these are the kinds of projects you would take development finance for.
How much can be borrowed with development finance?
It’s not as clear-cut as a standard mortgage. With a mortgage for the house you live in, it’s all about your income: you can only borrow as much as you can afford to pay back. But with development finance and bridging, it’s not really about your income. It’s about the value of the project.
The lender is going to be comfortable as long as there’s enough profit in the project – in that whatever you’re building can be sold at a price that will repay the development finance and leave you with some profit at the end.
Can I get 100% development finance?
Yes and no. If you’re buying land with planning to build some houses on, you’re going to have to put some money in yourself. Possibly not as much as you might think – although I can’t put a figure on it because it depends on the lender’s criteria. But you will need a bit of a deposit to put into the purchase.
The development finance company wants to know that the project can be finished. So if they’ve lent you all of the money needed to build the properties, even if something goes wrong, the project can be finished and sold to get their money back.
If you already own the land, you could potentially borrow 100% of the money required to build properties there, as long as they can be sold for enough to repay the finance company, plus some profit. It’s a roundabout kind of answer, because it really depends on the project.
We’ve got to make sure there’s enough meat on the bone. Sorry, if you’re vegan. We need to make sure that everyone can be repaid. If so, the amount you can borrow can be fairly flexible.
Who is eligible for development finance?
There’s no set rule – it depends on the land and your team. If Joe Bloggs off the street pitches up wanting to buy a plot of land and build 10 houses, a lender is probably going to be a little bit sceptical of their ability to see that through.
But if that same person has an architect on their side and a project manager that’s done it before, so really, it’s just their money and their name on the door, then a lender will be comfortable. So potentially, anyone can get development finance.
You don’t tend to get many people taking on big projects that haven’t done it before. They tend to start off with smaller projects, to get some experience. The more experience you’ve got, the easier it is to fund your next investment.
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How much does development finance cost?
If you’ve listened to our insightful podcast on bridging loans [add link], it’s a similar deal. There will be monthly interest. The rate depends on the lender, the project, how much money we want and how that compares to the final value.
You pay a monthly interest for the amount of time that you’ve got the finance in place. Let’s say you’ve borrowed £1 million to build four houses. You’re going to build one, sell it, build another one and sell that. Every time you sell one, you’ll pay off a chunk of the development finance, and the finance company will want to make sure that that happens.
They’ll want to know that the plot one is sold. You’re carrying on with the others, but plot one is sold, and you’ve now got a few hundred thousand pounds coming in, and they want that money. Plot two will sell, they want that money, then plot three will sell, but you won’t be paying much interest now because you’ve paid off a good chunk of what you borrowed. Then plot four is probably where you make your profit.
That tends to be how it works and what it costs. But it’s more expensive than a normal mortgage on the house you live in, because of the monthly interest. At the start of the project, we’ll aim to build in enough profit to cover your interest on the development finance.
When do I need to repay a development finance loan?
If you’re doing an ongoing project and selling bits of it as you go along, you’re going to need to repay the development finance with the proceeds of the sales. Or, if you’re building one or two, and they’re being sold at the same time, that’s when you pay it off.
Basically, it needs to be paid off as and when you get money in from the project. The loan will have a lifespan. It might be a 12 or 18 month deal, or perhaps two years. But as the project completes and as you get money in, the development finance needs to be repaid. You don’t need to repay monthly, though, the interest will just accumulate each month until you pay it off.
What are the pros and cons of development finance?
If you need to borrow money to do a development project, there isn’t really any other choice. You could potentially get a bridging loan depending on the project, but that works in a very similar way.
In fact, I did a bridging loan for someone who bought some offices to convert into flats. He had some money of his own so there was enough meat on the bone – sorry vegans – with that project to take bridging finance.
We didn’t need to worry about what it was going to be worth at the end. But if you’re doing a project where you need this type of finance there isn’t really an alternative, which means that pros and cons aren’t really important.
If you didn’t need it, we wouldn’t be here talking about it. Perhaps you have the ability to refinance your own house and raise enough cash to do the project or you’ve got inheritance coming, you would do that. This is quite expensive finance to take if you don’t need to.
How do you get or apply for development finance?
Not every mortgage broker can do bridging and development finance. Some will pass you on to a third party packager. We don’t do that – our own commercial finance business can help you with this directly.
We will go through the details about who you are and what the project is, who you’ve got around you and your plans. We’ll then take that off to some lenders and find the most suitable deal.
With bridging and development finance, it’s not necessarily a quest for the lowest rate. We want a good rate, but lenders are similar on rate and costs. What’s more important is the deal – some will help you and some won’t. It depends what type of business they like.
We take all of the information we need about you and we go off to find the most appropriate lender.
What if I have bad credit?
This might be an unfair generalisation, but I would say if you’ve got the funds and the know-how to need development finance, the chances are you’re fairly savvy. We’re probably not going to be talking about major credit issues. We’re not going to struggle too much for you. Lenders are more flexible for this type of finance than banks are for a residential mortgage.
As with any kind of borrowing, the worse your credit history is, the harder it’s going to be to find a lender that’s going to be okay with it. It very much depends on the details. If you missed a credit card bill and made it up six months ago, no one’s really going to care. But if you became bankrupt three weeks ago, that’s a different story.
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