Development Finance – how to fund your property renovation
Building, renovating or extending a property is often a good way to generate a significant profit.
Whether you’re building a single home for rental or resale, or a number of properties, a common way to fund property renovation and build costs is with a development loan. These loans are open to both private and commercial property developments.
What are development loans?
Development loans help people fund property projects that involve construction. Described as medium term loans, they usually last between 12 and 36 months.
Typical projects are the complete build of a property from the ground up, or a large scale conversion of an existing building.
The loan is secured against the land and property, and is repaid at the end of the term by selling the property or with another form of finance.
Advantages of development loans
A key advantage of development loans is flexibility. There are usually no early repayment charges, so you can end the loan whenever you are ready. The sooner you repay the loan, the more you save further interest charges.
Property development finance gives you access to much higher sums of money than other borrowing methods, especially when the property is not eligible for a mortgage. ‘Uninhabitable’ buildings, that are considered derelict or have no working kitchen or bathroom, cannot be mortgaged,
You can plan to fund the project in stages, which keeps finance costs down. Interest is only charged once money is released, so it makes sense to phase the payments as needed.
Development loan finance costs
Development loans involve various fees, although they will vary between lenders. Typical fees include:
- Arrangement fees – sometimes called facility fees, these are usually a percentage of the total loan.
- Interest – either monthly or annual, interest rates are generally higher than mortgage rates.
- Exit fees – due when you repay the loan, they are usually based on the amount borrowed.
- Broker fees – We receive a commission from lenders and charge clients directly depending on their development requirements
There will also be other costs to plan for including valuation, legal fees, monitoring fees (where the lender keeps an eye on the development’s progress).
The development finance process
The first stage in securing a development loan is to calculate how much your project will cost and how much you can borrow.
Many lenders will limit the loan to 50-60% of the total cost and expect you to fund the remainder with cash or another form of finance. However, you may be able to finance 100% of the build if it costs around 60 to 70% of the estimated final property value. You may need to demonstrate that you are an experienced developer to access this option.
Once your application has been accepted, you can receive the first payment fairly quickly.
Repaying the development loan and exit finance options
You can wait until the end of the term, or repay the loan amount more quickly – there are no penalties for either approach. What is important is that you are clear about how you will repay the loan before you take it out.
Many people repay the loan by selling the completed development project. If you are not planning to sell, however, and instead rent the property out, you might choose a new form of finance to repay the development loan in the short term.
This new loan is sometimes called development exit finance. There are three further ways it can be useful:
- If your development loan is ending but the property sale won’t complete in time.
- Where exit finance is available at a lower rate than your development loan. This is useful when interest rates fall.
- To release capital before property sales go through, so you can move on to your next project.
Development finance brokers
Development finance is not a product that’s readily available on the high street, although some banks and building societies will offer it through their commercial arm.
As with many financial services, it is well worth seeking expert advice to get a competitive deal that suits your specific circumstances.
As experienced brokers we will explore a wide range of lenders on your behalf, taking you through the application process and beyond. We are fully authorised and regulated by the Financial Conduct Authority to provide tailored advice and support on all kinds of property financing. Contact us for an initial chat today.
Any Development Finance enquiries are not provided through CS Mortgage Solutions. They are referred to Fiducia which is authorised and regulated by the Financial Conduct Authority.