On paper, the concept of development finance seems fairly straightforward. In practice, there are a great many moving parts that can make development finance a comparatively complex product.
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What Exactly is Development Finance?
Development finance is a specialist short-term facility, issued for a broad range of property development and construction projects. It can be used for almost any legal purpose, from ground-up developments to property renovations to repurposing commercial properties for residential usage.
Issued strictly over the short term, development finance is comparatively quick to arrange (often less than two weeks) and is repaid within one to 24 months. The full loan balance (plus interest and borrowing costs) is repaid in the form of a single lump sum payment, meaning no monthly repayments are required in the interim.
How Does Development Finance Work?
Development finance differs from most conventional loans in the way the funds are transferred to the borrower. There are no limitations on maximum loan sizes, and the facility is secured against assets of value (usually residential or commercial property) like most secured loans.
But rather than being transferred to the applicant all at once, development finance is issued over a series of instalments. These instalments are tied to the completion of major phases of the project, overseen by a surveyor hired by the lender (and paid for by the borrower).
Subsequent loan instalments are only authorised when the lender is satisfied the project is progressing as planned, in accordance with predetermined timeframes and targets.
Who is Development Finance For?
Most development finance specialists restrict their services to established developers and construction companies. First-time developers with no provable track record may find it difficult to qualify for a specialist development finance loan.
There are exceptions, but it is normally a requirement to provide evidence of relevant experience in property development, and a portfolio of successfully completed projects. Where newcomers to property developments are unable to qualify for development finance, a bridging loan is often the preferred choice.
How is Development Finance Repaid?
Evidence of a viable ‘exit strategy’ must be provided, in order for a development finance application to be authorised. This refers to the method by which the borrower intends to repay the loan at a later date.
For example, the borrower may have already lined up a buyer for the development upon completion of the project. When the development is sold, the funds raised can be used to repay the development finance loan.
Alternatively, the developer may wish to retain ownership of the property and repay the development finance loan by transitioning the facility to a longer-term repayment product, such as a buy-to-let mortgage.
Along with a viable exit strategy, lenders also expect to see evidence of adequate contingency planning. This means that in the event that the planned exit strategy falls through, steps have been taken to ensure that the lender will still get their money back – in full and on time.
How Much Does Development Finance Cost?
Every development finance loan is a bespoke facility, tailored to meet the unique requirements of the borrower. This in turn means that no two development finance agreements are the same.
Interest payable on a development finance loan can be as low as 0.5% per month. Additional costs that may be incurred include arrangement fees, legal fees, surveyor fees, completion fees, and (in the case of some lenders) early repayment fees.
This is why it is essential to enlist the support of an experienced broker, who can negotiate on your behalf to ensure you get an unbeatable deal. As many development finance specialists offer their services exclusively via introductions, this is the only way to access some of the most competitive deals on the market.