How Does Development Finance Work?

Development finance is a flexible way of funding a vast range of projects, most of which wouldn’t be eligible for conventional mortgage finance.

Examples include:

• Residential, commercial and semi-commercial developments.
• Refurbs, conversions and renovations.
• New build projects.

The great benefit of development finance is that you can use it to finance the cost of purchasing a plot of land and the build costs – provided you have a deposit available.

Most lenders will ask for around a 30% deposit on the initial investment and then can lend up to 100% of the development costs, based on the final sale price calculation, called gross development value.

Today the Revolution Brokers team explains in a little more detail how development finance works, why it’s an advantageous loan for many projects, and what lenders will look for on your application.

For more information or help financing a development project you’re working on, please give us a call on 0330 304 3040 or drop an email to info@revolutionbrokers.co.uk.

Benefits of Using Development Finance

Even if you had the budget available to cover a development project, there are several advantages to using a development finance facility.

• Financing a property purchase or land investment, plus the development or build costs, requires a considerable amount of capital. Using development finance means you can supplement your budget to take on a larger project or keep a contingency available for other opportunities.
• Keeping cash in reserve is an enviable position. If the project runs over time, doesn’t sell, or you can’t remortgage the development finance straight away, you have a backup in place.
• Using development finance enables many developers to undertake several projects at once without waiting until a completed property sells before they can begin the next.
• Investment returns (ROI) are improved by using less capital. Although you have the cost of financing to deduct from your profits, your rate of return against personal investment will still be higher.

The other key benefit is that development finance applies to just about any development project, whether it’s building a new home on an empty plot of land or renovating a dilapidated warehouse into a smart new commercial building.

How Much Can I Borrow Through Developer Finance?

Exact loan values will depend on several factors:

• The cost of the land or existing building.
• Your cost for the renovation, conversion or building work.
• Lender fees – such as arrangement fees and exit penalties.
• Professional costs, including solicitors and surveyors.

Most UK development finance lenders will consider lending up to 70% of the cost of the land or site and 100% of the build cost.

How Does Development Finance Work in Practice?

Unlike a mortgage, you won’t need to pay 100% of your build costs all at once. Instead, you receive payments in stages as the work progresses.

The initial payout is the amount borrowed to purchase the site.

Then, you’ll receive tranches throughout the work, in line with your agreed schedule. Your lender will usually send a surveyor to assess that the work has been completed before verifying that the next batch of funding can be released.

How Does Interest Work on a Development Finance Agreement?

Most developer finance accounts allow the borrower to pay interest each month or roll the interest into the total payable at the end.

Adding interest to the loan can help cash flow since you don’t want to be paying out cash during a development project when you could use this to cover contingencies elsewhere.

Once the unit is sold or mortgaged, that income is used to pay back the development finance, including interest.

What is an Exit Strategy for a Development Finance Loan?

Lenders need to assess your exit strategy before extending development finance. That’s because they need to be confident you’ll be able to repay the loan and that the site will be worth enough to cover the capital balance plus interest.

Some of the most common ways to refinance development loans include:

• Selling the property or site once work is complete.
• Refinancing on a developer finance exit product. These offer lower interest rates, helping to pay back the original loan until you sell or refinance the site.
• Mortgaging the property. If you want to keep the development mortgage at a low rate, you’ll usually need to have an agreement in principle based on the projected value.

How Does Development Exit Finance Factor In?

Development exit finance is like an interim stage, when you’ve finished work and want to repay your development finance loan but haven’t yet been able to sell the property.

There are lots of reasons a development exit finance loan might be an advisable solution:

• To reduce your interest rate and maximise profit between finishing work and selling the site.
• To tide over the project if your facility is about to end, but you haven’t been able to complete a sale in time.
• To free up capital earlier than you would have been able to via a sale so that you can finance your next development project.

Exit finance isn’t a long-term solution but is a lower-cost bridging loan to ensure developers don’t end up tied into a more expensive development finance product than they need.

What Are the Stages of Applying for Development Finance?

Here’s how it works:

1. Contact Revolution Brokers on 0330 304 3040 or email us at info@revolutionbrokers.co.uk.
2. We assess the project, profit margins, circumstances and borrowing required to make independent recommendations from a whole-of-market overview.
3. The property is valued through a site visit to establish the anticipated value.
4. We compile your application and advise when we have negotiated a formal loan offer that presents good value for money.
5. You work through the legal steps with your solicitor and move on to completion.

After that, you can make your first drawdown, and as the development progresses, you access further batches of funding to finance the next step in the project.

Finally, when the development is sold or refinanced, you repay the loan and look forward to beginning your subsequent development!