How do you raise development finance for a property when you don’t have any cash lying about? You’ll have to explore property development financing options.
Luckily, there are a range of loans or mortgage options that you may be eligible for as an investor. But the complicated industry means that having a strategy is key. Not only that, but you’ll have to be aware of some major rules and regulations that the financial conduct authority sets out.
What is Property Development Finance?
When house buyers want to get started with renovations or property companies need to begin developments, they’ll often use financing. This can happen in many ways, but typically takes the form of a short-term, high-interest loan.
Property development finance is used for construction projects, such as a loft conversion. Alternatively, it might be used to secure a plot of land. For some types of development financing, the funding can only contribute towards properties for residential use. So, buildings for offices, shops, or other businesses found on the high street will likely not qualify. Others support commercial developments and mixed properties.
There are quite a few sources of development finance, which means that the eligibility criteria does vary. While some lenders focus on your personal credit score and circumstances, others prefer to analyze your business plan. Eligibility is a key factor to consider before applying for any property development loan, as you may be better suited to one source over another.
How do Property Developers Raise Finance?
As mentioned, there are a number of different property financing options available to developers. These include:
- Cash
- Buy-to-let mortgage
- Buy-to-sell mortgage
- Bridging loans
- Specialised property loans
- Personal loans
Cash
Cash, if you have it, is likely to be the easiest way to finance property development. Without the need to rely on loans, property developers using cash can forego interest and keep the development as cheap as possible. If you can afford to use cash, it should be your priority when sourcing income for your property development project.
Buy-to-let Mortgage
Those planning on creating a rental income from their property may find themselves eligible for a specialised mortgage. In most cases, there will be clauses in the mortgage preventing subletting or letting, but the buy-to-let mortgage allows property owners to rent out rooms or the entire residence.
However, eligibility criteria for a buy-to-let mortgage varies from your typical residential mortgage. Lenders will usually require a 25%-40% deposit and experience higher fees. Typically, these mortgages operate on an interest-only basis too.
Buy-to-sell Mortgage
Most run-of-the-mill mortgages will lock you in for 2+ years before you become eligible to sell. For those looking for a quick turnaround after renovating a property, you’ll be required to sign on for a buy-to-sell mortgage.
Again, these mortgages often attract higher fees than normal, with a larger deposit also required. However, this type of mortgage does come with the flexibility to sell as and when you are ready.
Bridging Loan
A bridging loan is especially useful for borrowing over the short term. Instead of annual interest rates, these usually come with monthly pricing. They are typically used in a property chain, where you want to buy a new property but have not yet sold your current house. A bridging loan credits you for that short period until your property is then sold, and you have the funds to pay back the amount.
There are a couple of types of bridging loans: open and closed, which dictate the payback period. They are much more expensive to hold than a regular mortgage but are available on a wider number of properties that your standard high street mortgage may not offer.
Specialised Property Loan
You might be eligible to receive funding from a private source that offers specialised property loans. Separate from high street mortgage companies, there are hundreds of sources that focus on raising finance for commercial or residential developments, and even individual brokers who can manage the transaction.
Specialised property loans are typically handled privately but are still subject to regulations from the financial conduct authority. This can lead to fluctuations in the standard interest rate, for example.
Personal Loans
Otherwise known as unsecured loans, personal loans are not secured against your property or any other asset. Instead, they are a fast credit option used by many to make a large purchase (such as a property). Repayments tend to be fixed instead of flexible and you’re typically eligible to pay back the loan in full before the end of term, if able to.
How does Property Development Finance Work?
First, you’ll decide on which finance property development route is most suited to your situation. You’ll work out how much you require to make the renovations to your property. This will have to match up to the amount you can borrow, which is likely to be determined by:
- The current house value (drawn from a valuation report about the property and current market)
- The cost of your proposed development (is this a light renovation project, heavy refurbishment, or a ground-up development?)
- The expected value of your property once all development has been completed
Unfortunately, the amount that lenders can offer varies and there is no set parameter or guarantee of the amount you could get. However, it’s usually a majority percentage of the house value or up to 100% of the development costs.
It’s important to remember the charges involved with taking out finance, though. Your loans are not only subjected to interest rates but also different fees depending on the amount borrowed and the term of the loan.
Depending on the funding route you chose, you’ll either be expected to pay back the loan in full after selling the newly developed property or in smaller increments over a pre-determined timeline.
How do you Access Property Development Finance?
You can apply for property development finance through a number of schemes or private routes. In some cases, you’re likely to require professional help from a Mortgage Adviser, for example.
Ensure you do your due diligence on the type of development you are attempting, and are not rushing in without the full picture. In some cases, developers use loans to secure planning permission but this can be risky as it can take a long time to be granted which can extend the loan term. Sometimes, planning permission is outright rejected, which halts plans there and then!
Lenders also like experience, so if you can show that you have previously been involved in a similar project, you are much more likely to be accepted. If you are a first-time developer, you’ll need to show your knowledge. Perhaps you’ll even contribute your own funds to the project to be taken seriously. Remember private property finance groups have a different criteria to high street lenders.
Finally, be realistic about the timeline of your project and the resources available to you. While it’s all well and good to fill out the paperwork carefully; under or overfunding a project can lead to serious complications later down the line. It’s important to be as accurate as possible while also allowing for emergencies and extra expenses along the way.
As you can see, securing development finance for property projects can be complex and time-consuming. But whether you require commercial property finance or want to renovate your own home, we hope this article has helped explain your options that little bit better. If you did enjoy this article, please feel free to leave us a comment and share with your friends!
