Development Finance

What is Property Development Finance?

Property development finance is a type of short-term loan that is typically used by property developers to fund the costs of acquiring and developing land for new build projects. The loan is usually repaid when the properties are sold or refinanced.

There are various types of products that can be used to finance property development, including mortgages, term loans, bridging loans and mezzanine finance.

A wide range of costs associated with developing a new property can be covered by development finance, including:

• The purchase price of the land
• The cost of any necessary demolition work
• The cost of building construction
• The cost of fitting out the property
• The cost of professional fees

If you require property development finance, our team can help. At Echo Finance, we work with lenders from across the entire lending market to help you find the right finance for your needs.

For more information or to speak to one of our advisors, call us today on 0800 093 4914.

Development Types

The type of finance you'll need will depend on the type of property development project you're undertaking.

Light Refurbishment

If your project involves light property refurbishment work, such as cosmetic changes and decoration, you may be able to finance this with a bridging loan until longer-term finance can be arranged.

Renovation/Heavy Refurbishment

For more extensive refurbishment or property conversions, you may consider a commercial mortgage or bridging finance on a longer-term basis.

Ground-up Development

If you're undertaking a ground-up development, such as building a new property from scratch, development finance can fund around 70-80% of the project costs. This can include the purchase of the land, the cost of construction and professional fees.

Can I get development finance as a first-time developer?

Experienced developers will typically have a good track record of successfully completing similar projects and will be able to provide evidence of this to lenders. If you're a first-time developer, you may still be able to access development finance but it's likely that the terms of the loan will be less favourable. You may also find that your choice of lender is more limited.

First-time developers will usually need to provide a larger deposit than experienced developers and the loan amount may be capped at a lower percentage of the overall project costs.

How does development finance work?

Development finance works by providing developers with the funds they need to purchase land and cover the costs of construction. The loan is typically repaid when the properties are sold or refinanced.

The amount of finance available, and the terms of the loan, will vary depending on the lender and the individual project. However, most lenders will require the following:

• Details of the site, your planning permission details and any required building consent
• A detailed development budget
• Information on your previous experience as a developer
• Gross Development Value (GDV) – an estimate of the value of the property once it is completed
• Details of your proposed sales and marketing strategy
• Details of the company structure, the main contractor and the professional team

Why use development finance?

Development finance can be a useful way of funding projects where traditional forms of finance are not available. It can also be used to finance projects where the risks are higher than usual. This type of finance typically comes with higher interest rates and shorter repayment terms than standard mortgages, so it is important to consider the risks before taking out a loan.

What are the benefits?

This type of finance can be a useful way for developers to access the funds they need to get their projects off the ground. It can also help to spread the risk associated with property development, as the loan is usually repaid from the proceeds of the sale of the properties.

There are a number of benefits, including:

Access to funds:

Development loans can provide developers with the funds they need to purchase land and cover the construction costs associated with their projects.

Flexibility:

The finance can be structured in a way that suits the specific needs of each project. This includes features such as interest-only periods and no pre-payment penalties.

Spreading the risk

As the loan is usually repaid from the proceeds of the sale of the properties, development loans can help to spread the risk associated with property development.

What are the risks of development finance?

As with any type of loan, there are a number of risks. These include:

Default risk:

If a developer is unable to repay the loan, they may default on their payments and be liable for any outstanding debt.

Interest rate risk

This type of finance typically comes with variable interest rates, which means that the cost of repayments can increase if interest rates rise.

Liquidity risk

If a developer is unable to sell their properties or refinance their loan, they may be left with little or no option but to sell at a loss.

Political risk

Changes in government policy can have a significant impact on the property market and, as such, the viability of development projects.

When is the money released?

The lender will usually release funds in stages, based on the progress of the development. This allows them to monitor the project and minimise their risk.

The first stage is typically known as the 'purchase stage', where funds are released to purchase the land. The lender will usually appoint a surveyor to visit the site at each stage and confirm that the work has been completed to their satisfaction.

What are the key considerations for developers when taking out development finance loans?

Developers should consider a number of factors, including:

-The type of project: The type of project will dictate the best type of lending product.

-The location of the project: The viability of a development project can be affected by its location. Factors to consider include the local economy, infrastructure and planning regulations.

-The size of the project: The amount of finance required will depend on the size and scope of the project.

-The stage of the project: Development finance can be used to fund both the acquisition of land and the construction costs associated with a project. It is important to consider how much finance is required at each project stage.

-Repayment terms: Development finance is usually repaid when the properties are sold or refinanced. It is important to consider the repayment terms and conditions before taking out a loan.

-Interest rates: As with any lending, if interest rates rise, the cost of repayments will also increase on a variable rate deal. It is important to consider this when comparing options.

-Loan to value ratio: The loan to value (LTV) ratio is the amount of the loan compared to the value of the property. Lenders typically require a lower LTV than they do for standard mortgages.

-Security: Lenders will usually require some form of security. This may take the form of a first charge on the property or a personal guarantee from the developer.

- Exit strategy: It is important to have a clear exit strategy. This may involve selling the property or refinancing the loan.

The main types of development finance

There are a number of different types of development finance products, each with its own features and benefits. The main types include:

Bridging loan

Bridge loans are short-term loans that can be used to finance the purchase of land or property. They are typically repaid within 12 months and usually have high-interest rates.

Refurbishment Finance

Refurbishment finance is a type of loan that can be used to fund the costs associated with renovating an existing property. The loan is usually repaid when the property is sold or refinanced.

Commercial Development Finance

Commercial development finance is a type of loan that can be used to finance the construction of commercial buildings, such as office blocks or retail units. There are fewer lenders operating in this area of the market.

100% Development Finance

100% development finance is a type of loan that can be used to finance all of the costs associated with the development, with the lender sharing the residual profits from the project. This type of financing is typically only available to experienced developers and is often secured against a personal guarantee.

Regulated Development Finance

If the development will be the primary home of the developer (i.e a self-build project) then the loan will be regulated by the Financial Conduct Authority (FCA).

Residential Development Finance

This type of finance is to fund small or large-scale residential projects. The finance is used to purchase the land, as well as to fund the construction costs associated with the development.

Mezzanine finance

Mezzanine finance is used to bridge the gap between the maximum loan from the principal lender and the deposit available to the developer. It is typically repaid through the sale of the property or refinancing.

Development Exit Finance

Development Exit Finance is a type of loan that is typically used to repay Development Finance before the sale of the completed project. This type of finance is typically used when the Developer wants to exit the project early, and often has lower rates than the finance in place.

When is development finance repaid?

Development finance is typically repaid when the development is sold, or re-mortgaged. The loan is either repaid in full or transferred to a conventional mortgage.

How much can you borrow on development finance?

The amount you can borrow will depend on a number of factors, including the value of the property, the type of loan, and the lender.

You should speak to a specialist broker to get an accurate estimate of how much you can borrow. At Echo Finance, we have a team of experienced brokers who can help you find the right loan for your project.

What types of projects can development finance be used for?

A development loan can be used for a wide range of projects, including:

- Residential developments: New homes, flats, and apartments.

- Commercial developments: Office blocks, retail parks, and industrial estates.

- Mixed-use developments: Projects that combine residential and commercial elements.

- Refurbishment projects: Refurbishment of existing properties.

It can also be used to finance the costs associated with planning permission and other legal fees.

How long does it take to get development finance?

The time it takes will vary depending on the lender and the complexity of the project. You should speak to a specialist broker to get an accurate estimate of how long it will take to get funding for your project.

If you are interested in applying, you should speak to a specialist broker. They will be able to assess your project and provide you with a tailored financing solution.

Our team can help you find the right loan for your project.

Speak to an expert

At Echo Finance, we work with the entire lending market to find the best solution for your development project. We have a team of experienced brokers who can provide you with advice and support throughout the process. Contact us today on 0800 093 4914 or complete our online enquiry form and we will be in touch.