Property development finance

What is development finance?

Development finance is a short-term property finance solution used to build new properties or to convert or heavily refurbish existing buildings. It can be used for developing both residential and commercial property. 

Borrowers typically use it for construction projects that are bigger and more expensive than standard property refurbishments. As a guide, we recommend that projects costing over £250,000 use development finance rather than refurbishment finance.

How does development finance work?

Development finance is designed to help with a property development project's purchase and build costs.

Unlike other types of property finance, development finance is typically released in stages based on pre-agreed points in the development project. By releasing the funds in stages, development lenders can keep track of spending and the physical progress of your project. Ultimately, they need to be sure you’re using their money for what you’ve said you will!

For large-scale projects, the release of funds is subject to independent monitoring surveyor (IMS) sign-off. Your lender will use these surveyors to ensure the works are on time and within budget.

Some lenders will release the whole loan at once for smaller development projects. Our team of expert development finance brokers will advise you on how different lenders will approach your project.

How do lenders assess development finance applications?

To submit a development finance application, you’ll need:

• Proof of relevant property development experience or an appropriately qualified team working with you.
• A thorough and costed project plan, including materials, labour, fees and contingency.
• Personal and, if required, business bank statements. Your lender will assess your financial credibility, including your credit history, income, and other debts.
• Proof of planning consent (if applicable)

Your lender will need to know all about the properties you intend to build or the current state of the existing buildings you plan to develop. 

Criteria vary by lender, so the type of property and the demand for it in its location will be essential to your application. Ultimately, lenders must be satisfied that you have a secure exit strategy to repay the development loan.

Do I need planning consent?

You’ll find it easier to secure property development finance with planning permission already granted. Your lender will want to see all the related documentation as part of the application.

Lenders may make an exception about planning consent if you’re a highly experienced developer who’s completed several successful projects. However, they will need proof that you’ve applied for planning permission at the point of application.

How much can I borrow?

How much you can borrow with development finance is based on a percentage of the gross development value (GDV) at the end of the work. Typically, lenders can lend up to 70% of the GDV and a maximum of 85% of the total costs. Standard development loans are a minimum of £250,000, with no absolute upper limit. Loans are typically structured to ensure that the developer’s contribution is utilised up front, with the lender providing the majority, if not all, of the build costs. It is usual for funds to be drawn down in stages against the architect’s or quantity surveyor’s certificates.

For example:

A developer has planning permission to build three houses with a gross development value estimated at £4.5 million. The total costs involved are £3.1 million, made up of £1.25 million for purchasing the land and £1.85 million in build costs. A lender might agree to development finance of £2.325m (limited to 75% of costs) structured as £475,000 initial advance followed by the balance in stages throughout the build.

Projected gross property development values will influence loan-to-project costs, but funding is available for up to 85% of the purchase and build costs.

Organising a loan to finance up to 100% of the property development costs is often possible where the borrower already owns the land unencumbered.

Where the property developer can improve the planning consent post-acquisition, we can often negotiate increased levels of funding that recognise higher land and gross development values.

The amount you can borrow is based on the strength of your proposal. The quickest way to determine how much you can borrow is to speak to one of our expert development finance brokers.

How long are development finance terms?

Property development finance terms are usually 12 to 24 months, depending on the size and nature of the project. 

We negotiate finance requirements with a full panel of property development lenders and other financial institutions to provide the right ‘match’ to the project.

Who can apply for property development finance?

Technically, you can apply for development finance as an individual, Limited Company, Limited Liability Partnership (LLP) or Trading Limited Company. 

However, what makes development finance slightly different from other forms of property finance is that your experience is essential to the success of your application. You’re unlikely to secure a development loan for a substantial ground-up development of a block of flats without any previous development or refurbishment experience. Generally, the advice is to start small and work up to larger projects.

With a strong record of completed developments on your CV, you’re more likely to secure better terms with your lender, as you’ll be considered less of a risk.

Interest rates for property development finance

While there are no real guidelines for development finance interest rates, a good benchmark starts from around 7.5%. 

Property development applications are assessed on a case-by-case basis and are priced according to the strength of the development proposition and you, the borrower. 

Our experts have access to the whole development finance lender market and will negotiate the best rate with the most suitable lender for your project

Additional fees for property development finance

There are several costs and fees to consider when applying for property development finance; however, unlike off-the-shelf products, actual fees applied and fee scales are not set in stone but are likely to include some or all of those listed below.

Arrangement fees

Also referred to as a facility fee, lenders charge these fees for arranging the loan, typically priced at 1-2% of the loan amount.

Exit fees

The fee payable to the lender to close the loan facility. Some lenders do not charge exit fees at all, but many do.

Some lenders charge an exit fee as a percentage of the loan amount, but others (and these are the fees you must look out for) base the fee on a percentage of the gross development amount. This can make a considerable difference, so don’t be fooled into taking what looks like a more competitive rate without doing the sums first. Currently, exit fees on development finance cost in the region of 1-2%.

For example:
A developer owns outright land worth £500,000. They then borrow £800,000 to build four detached houses, and at the end of the project, the Gross Development Value is £1.8 million. 

- 2% exit fee based on the loan amount: £16k
- 2% exit fee based on GDV: £36k

This demonstrates the importance of understanding the entire deal, so contact one of our brokers if you have any questions.

Valuation fees

As part of the application and risk assessment process, lenders will instruct a surveyor to place a detailed valuation on the development. The scale of these fees will depend on the size of the project.

If the project is extensive, you may also have to pay a monitoring surveyor or architect to confirm that the project has attained a certain standard as the build progresses. Lenders often use this system to ensure that funds are drawn down in a controlled way.

Broker fees

These are the fees brokers charge for finding a suitable lender, negotiating a price and getting you a suitable, formal loan offer. All brokers charge differently.

At MFB, we typically charge between 0.75% and 1% of the loan amount, depending on your case’s complexity. We usually only charge fees if we successfully get you a formal loan offer.

We may also charge an administration fee, but we will always tell you exactly what you can expect to pay upfront. We accept payments by debit and credit cards.

Interest

The monthly interest payments on the loan will depend upon the rate you are offered and be based on the amount of funds released. The monthly interest payments will increase as the development progresses and more funds are released.

In most cases, the interest is “rolled up”, which means that instead of paying it monthly, it is added to the outstanding principal amount – hence the term “rolled up”. Interest will then accrue on the total amount outstanding, and whilst the loan size increases, it does ease the pressure and cash flow on the borrower during the build.

Professional costs

In addition to paying surveyor valuation fees, you will likely have to use the services of other professionals during the project, including architects, quantity surveyors, solicitors and project managers. Often, these fees can be included in the loan.

Contingency fund

Most developers set aside a contingency fund - usually around 10% - to pay for unexpected costs.

How long does it take to get development finance?

How long it takes to get development finance will depend on the complexity of your project. However, in our experience, applications move through to completion in between two and four months.

Development finance exit options

As a short-term finance option, your development finance lender will need to know how you intend to repay the loan at the point of application. These development finance exit options may include:

• Selling the development
• Refinancing the developed property onto a standard mortgage. Depending on your development, this could be a homebuyer, buy to let or commercial mortgage.
• Selling and refinancing. If you’ve developed multiple units, you may wish to sell some and retain others as buy to let or commercial investment assets.