Property Development Finance Fees
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.
Also referred to as a facility fee, lenders charge these fees for arranging the loan and are typically priced at 1-2% of the loan amount.
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 exit fees 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 2%.
Say a developer owns outright land worth £500k. He then borrows £800k to build four detached houses, and at the end of the project, the Gross Development Value is £1.8m.
- 2% exit fee based on the loan amount: £16k
- 2% exit fee based on GDV: £36k
Clearly, this demonstrates the importance of understanding the entire deal, so do get in touch with one of our brokers if you have any questions.
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 fees to 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.
These are the fees brokers charge for finding a suitable lender, negotiating a price and getting the client a suitable, formal loan offer. All brokers charge differently. At Mortgages for Business, we typically charge between 0.75% to 1% of the loan amount, depending upon the case’s complexity. We usually only charge fees if we are successful in getting the client 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.
The monthly interest payments on the loan will depend upon the rate you are offered and be based on the amount of funds released. This means that as the development progresses and more funds are released, the monthly interest payments will increase.
In most cases, the interest is “rolled up”, which means that instead of paying it monthly, it is added to the outstanding principle amount – hence the term “rolled up”. Interest will then accrue on the total amount outstanding, and whilst this means that the loan size increases, it does ease the pressure and cash flow on the borrower during the build.
In addition to paying surveyor valuation fees, you are likely to have to use the services of other professionals during the course of the project, including architects, quantity surveyors, solicitors and project managers. Often these fees can be included in the loan.
Most developers set aside a contingency fund - usually around 10% - to pay for unexpected costs.
For more information about the process and fees involved in property development finance projects
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