Currently, development finance is getting more and more popular and many individuals are going for this particular option for funding their building projects.
When you apply for a development financing loan, you should be well prepared before you submit your application. There are many things you should essentially consider in this aspect. Careful planning is vital to make the right decision.
When applying for the first time, you may be confused. But, don’t worry, we have prepared this comprehensive guide to clarify all of your doubts. Here, we will talk about everything you need to know before going for development finance.
So, without any further ado, let’s dig into our discussion.
Development Finance: Know About The Lending Criteria First
Lending criteria is the most crucial thing to consider whenever you seek any financing option. You should bear in mind that development finance lenders will generally consider the application on a case-by-case basis. The same is applicable in this case, however, you need to know about the following basic lending criteria:
- Loan Term: It will generally range between 6 and 18 months in total. Some lenders may be more flexible with the development finance terms. So, the term varies from lender to lender. In some cases, the terms may range from 12 – 24 months without incurring any penalties for paying the loan earlier than expected.
- Experience: Another critical lending criterion involves the property developer’s experience level. Usually, experienced developers can expect to get lower interest rates when compared to inexperienced ones. The rate of interest will also depend on their experience.
- Security Offered: The building or site you are offering as security must also be suitable.
- Loan To Value Maximum: Generally, it will be in the region of a maximum of 55% of the GDV. In this aspect, the lender will consider how much you are willing to borrow as a percentage of the completed project’s GDV or Gross Development Value.
The maximum loan value you can get is based on the GDV, which usually is 55%. However, one thing to note is that it can even be higher than that. Some of the reputed development finance lenders provide LTV up to 100% of the built cost and 75% of the land purchase.
- Development Location: Your lender will also consider your building or site location before approving.
- Project Feasibility: The lender will again check the feasibility of the project you intend to carry out. If they find a lot of concerns, then there are chances that they can reject your application.
- Loan Size: It generally is £30,000, but it does not have any upper limit.
- Rate Of Interest: Interest rates usually start from 7% per annum.
- No Monthly Payment Required: As in the case of development finance, the interest will be rolled up all through the project, so you do not need to pay any monthly payments.
- Lender Arrangement Fee: It usually ranges between 1% to 2% of the loan amount. The lender may add these fees to the actual loan amount.
- Exit Fees: You may be required to pay an exit fee in certain situations, particularly where the LTV is high.
- Drawdowns: It will be made in line with your cash flow requirements. Also, it is subject to a visit by a QS or monitoring surveyor who the lender appoints.
- Valuer: The lender may also appoint a valuer to conduct a site valuation before development and ascertain the value once the properties are built. The valuer will also ensure that the proposed build costs are in line with the industry standards. It is termed GDV or Gross Development Value.
Basic Information Required For A Development Loan Application
When applying for a development finance loan, you need to provide some critical information to the lender. Don’t be concerned if you are not sure about that. Here, we have enlisted all those necessary details, which include:
- Development appraisal
- Development costs
- Building or site details: It includes the location, the value and the pricing of the property or site
- Company structure
- Asset and liability statement for the company directors or the applicants who are involved
- Who the main contractor will be
- Who will be the project manager for the development project
- GDV or Gross Development Value details: It involves providing evidence of the anticipated end value, particularly to the lender
- Planning permission details: What are you expecting to build, and what permissions do you have for your construction site.
- The details of all the associated applicants: If you are a limited company, you will also need to provide the details of the directors. It includes their CVs, the history of the past developments they have carried out, their success, and the profits made from previous projects.
What Paperwork Do You Require To Provide?
Paperwork again plays a significant role while you are applying for development finance. Some of the essential documents that you will require to provide are the following:
- Details of your past development experience
- Details of professionals who are associated with the project
- Planning permission details along with applications
- All drawings and designs of your development project
- A comprehensive breakdown of all the costs associated with the project
- A completed Asset, Liability, Income and Expenditure Summary
- A properly planned exit strategy for the project which is being carried out
Why Go For Development Financing Options?
By choosing the development financing option, you can relish the following attractive benefits as a proper developer:
- You can get speedy access to finance.
- You do not have to bear the debt for an extended time as the development finance does not have a longer repayment period.
- This option comes with low-interest rates.
- There is a limited capital outlay.
- You can even get finance for the refurbishment of the property.
- It is available in a diverse range of properties.
- You can carry out several development projects in a simultaneous manner.
In A Nutshell
After reading this article, we hope you adequately understand every detail about development finance. Now, you can quickly determine whether this financing option is right for your project requirements or not.
If you seek a short-term loan, your paperwork is ready, and you can repay the loan after the project completion, then go for development finance. But, if not then, try other financing options like bridging loans, mortgage finance, etc.
The main difference between bridging loans and development finance is that the lender does not provide you with the overall amount in the case of development finance. You will receive money in stages as the project progresses. Again, you can get development finance on an interest-only basis. You need to repay the interest in one lump sum at the term-end.
To repay your overall loan amount along with interest, you might either sell your completed property. Another option left behind you is to refinance your property to another arrangement, for example, a commercial mortgage.
If you find bridging loans to be a suitable option to choose, then UK Property Finance, a leading funding broker, provides you with the best opportunity to find out how much you can borrow. Use our bridging loan calculator to get an estimate.
At UK Property Finance, we provide custom financing solutions for your project requirements. Our highly experienced financial analysts and brokers work with well-known financial institutions to ensure that you get the best market rate in the industry.
Consider filling out our contact form today if you wish to learn more. We would love to get back to you at the earliest.