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Property development finance

Written By:
Myles Robinson - Expert Finance Advisor

Posted: Feb 8, 2023

What is property development finance?

Property development finance is a form of finance specifically designed to help with the finance of commercial and residential property development. You can use it for many projects including renovations and conversions as well as new builds.

Property development finance can be described as a wide range of finance options. While there are specific loans for development, there are also bridging loans and secured loans that can be used to finance property development. The best option for you will depend on the details of your development project and its expected cost.

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How does property development finance work?

Most lenders will ask for your exit plan when you apply for any type of property development loan. This will help property development finance lenders to determine how you will repay the loan. Most lenders will run credit checks, examine your finances and check your plans for development to ensure that your project is financially sound.

Your application for finance is accepted. You may be able to receive the funding in one lump sum, or in instalments. It will depend on what type of development finance and how much you borrowed.

You won’t have to repay the development loan, nor pay any interest each month, unlike other loans. This type of finance, plus the interest, will be repaid in full at the completion of your project.

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You can buy the property or renovate it by taking out a bridge loan. The loan can be repaid or you can sell the property. Bridging loans are short-term and not suitable for large-scale, long-term projects.

A buy-to-let mortgage would be more appropriate if you’re looking to purchase a property to rent out.

Contact us today to speak with our specialist lenders who are regulated by the financial conduct authority. We can use the lender comparison tool to ensure you are offered the best development finance rates.

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How can I get started with property development?

Research is essential if you are interested in property development. Development finance comparison is key. Property development can be risky. You will need to research the market and learn what factors can increase the property’s value. Also, you will need to find trustworthy professionals to complete the work.

You will need some capital to finance the project. The majority of lenders won’t pay the entire cost of your development project. You’ll have to pay the rest. In case of delays or overruns in your development project, it may be a good idea to have an additional source of income.

It may be more difficult to obtain finance approval if you are just starting out in property development. Lenders may view you as a higher risk than someone who has a track record in successful property development.

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What are the advantages & disadvantages of property development finance?

Property development finance has the advantage of being able to access large amounts of money. This can be used to fund a wide range of projects, from small renovations to major building projects. Although your development project might not be eligible for conventional loans from major lenders, specialist property finance may be able to offer development loans.

You may not be eligible for a standard mortgage to finance a property you intend to renovate. However, property development finance might be an option.

Unlike other personal or business loans you can repay the loan completely when you sell your property. You won’t have to make monthly payments during the construction.

The application process for property development is often lengthy because of the risk involved and large amounts of money.

You may also feel pressured to complete your project fast so that you can repay the loan on time. If you are unable to finish your project or repay the loan in full by the due date, you may be able to borrow more money. However, this will increase your total repayments.

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How to apply for finance for property development

It is a good idea to obtain planning permission for any planned developments before you apply for finance. You may be eligible for funding from some providers before you obtain planning permission. This could be to purchase a parcel of land or property. However, you will need all the permissions necessary to access additional finance for your development project.

Lenders will ask you to explain how you intend to repay the loan. You will also need to present plans for your project when you apply. You will need to provide key information such as the price of the property, the estimated total cost of your project, and how long you anticipate the work to take.

They might also want extra assurance about the project such as confirmation that professionals are involved and an independent valuation of the property. And they may want to ensure you have sufficient funds to cover any unexpected costs.

Lenders will also check your credit score, and, if applicable, the credit rating for your business.

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What is the maximum amount I can borrow?

Property development finance can allow you to borrow a certain amount depending on your financial situation, credit history, and project.

The number of loans you can get can vary from thousands to millions.

The amount of the property’s total value or the GDV (gross developmental value) will be limited by the providers. GDV refers to the projected return on the project after it has been completed and sold.

The rest of the project would be funded by you.

While some lenders might only finance loans for a short time, others may offer loans with longer terms.

What fees or costs are involved in a loan for development?

You will be charged interest for property development finance, just like all loans.

Other fees may be charged by the lender. They may also charge an arrangement fee or exit fee. You may be required to pay a valuation fee if lenders want to do their own valuation.

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How do I repay development finance?

Most forms of development finance will be repaid in full in the end. These loans are not like other loans that you pay in monthly instalments.

You can also wait until your development project is complete and then sell the property to get the proceeds. This will allow you to repay your loan and any interest accrued.

What are the options for financing a UK property development project?

A short-term bridging loan is a good option if you are looking to finance minor renovations to your property. These loans are not appropriate for long-term projects because they are based on the assumption that you will sell the property to repay the loan.

A secured loan might also be an option. Your property may be at risk if you fail to make your payments.

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FAQ’s about Property Development Loans

Can I get a loan for development on land that does not require planning permission?

When you apply for property development finance, many lenders will require that you have planning permission. While you wait for permission, you might still be eligible to apply for limited funding from some lenders. This could be for land purchases, or to get more money once you have planning permission.

What is the fastest way to get a loan for property development?

It will depend on your lender, the amount of work you are planning and the amount you wish to borrow. Some lenders will pay your property development loan in instalments throughout the duration of your project.

If I purchase a property through an auction, can I get a loan?

If you don’t have enough funds, special finance options are available. Your application will be influenced by the type of property, its price, your plans for it, and your financial situation.

What if I have bad credit?

It may be more difficult to obtain property development finance if you have poor credit. It’s possible, but not impossible. Lenders will consider the details of your project and your credit score to make a decision about your application. If you have poor credit, you may be charged higher interest rates.

Do I need a limited company to develop my property?

Your situation will determine your decision. Although you don’t have to create a limited company to develop the property, it might make sense in certain cases. You should research the tax implications for developing and selling property both as an individual and through a limited corporation.

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Are property development finance & bridging loans the same thing?

Although they are not the exact same thing, property development finance and bridging loans can be used for similar purposes. Property development finance can be used for any type of development project, including building a new building or renovating or converting an existing one. If you are looking to purchase a property and renovate it before selling it, bridging loans may be available. Bridging loans are short-term and not suitable for larger projects that will require more time.

You can also use bridging loans for other purposes than property development. For example, if you are looking to purchase a house, but have not sold your current property, you could apply for a loan.

Are limited partnerships or companies able to get finance for property development?

Property development funding is available to limited companies and partnerships. Lender eligibility criteria can vary, so be sure to verify that you are eligible for funding.

What is GDV?

GDV is shorthand for gross development value. This is the estimated value of the project after all work has been completed. You can get finance up to a certain percentage of the GDV from many lenders, but you’ll need to pay the rest yourself.

What is the maximum term I can repay for a loan to develop a property?

The length and scale of the project will determine the term of your development loan. You may need to repay the loan within a few months or one year for smaller projects. For larger projects, however, it may take longer.

What is development exit finance?

You can use development exit finance to fund your development projects. Exit finance can be used to repay your original property development loan. This will give you more time to finish the work and/or sell the property.

Contact us today if you require property development finance work or advice.

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