Development finance in a nutshell
As complex and multi-layered and opaque as the world of property development and high finance might seem from the outside, at the heart of the issue is a fairly simple concept:
Buying land and building property is an expensive business, so major finance institutions exist to provide the capital needed to complete a project, and are paid back with interest when the development is completed.
So, let’s cut through the complex jargon and get to the heart of the issue. Here is the ‘in a nutshell guide to the world of development finance.
What types of development finance are there?
The type of financing you will need will depend very much on the type of project you are hoping to develop:
- New build residential property
- Commercial property
- Renovation, refurbishment or conversion to HMO
Then there are different types of financing loan available which depend on what stage of development you are at:
- Land purchase loan
- Land purchase and build cost loan – will usually cover 100% of the land purchase cost and 60-70% of the building cost
- Bridging loan – for loan exit or to cover a sales period
- Mezzanine finance – used to finance part of the development not covered by the initial loan and repaid through a percentage of the project’s profit
How much can you borrow and how much are repayments?
A typical range for a borrowing amount from an alternative lender will be between £100,000 and £2.5million for land purchase and building.
In terms of interest rates, this depends very much on the other aspects of the development, from location to the contractor’s experience. However, the range would normally encompass around an 8-18% interest rate over a 12-month loan period.
Who will lend to you?
Alternative lenders exist to help facilitate development finance for building projects, especially when individuals are unable to secure loans from commercial banks in order to scale. To apply for this sort of loan you will need to provide certain information as seen in this example here.
Different types of a development project
Every property development is unique and so there is not a truly one-size-fits-all financing model that can be applied to every project
A reputable lender will assess your application on its own merits and offer a rate of interest applicable to the risk and profitability of the project.
For instance, there is a major difference between a single unit residential development and a 150 50 unit commercial development. Some of the most common types of the project include:
- Conversion of an existing residential property to HMO
- Demolition of the existing building and use of land to rebuild residential properties. These no longer require full planning applications.
- Purchase of land to build property or properties where there were none before
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