How Does Building Development Finance Work?

Finance is essential for building successful development projects. Whether it’s a new single house, new housing site new office or shop, or the renovation of an existing property, getting the necessary financing is paramount to making things work.

Development loans are a popular source of funding for developers who require money to purchase land and construct homes. Similar to mortgages, they work on the same principle but with more specialized requirements and typically require additional checks.

Development finance – What is the typical Loan to value you can get

Your loan to value ratio for a house building development project depends on the loan type, asset value and lender you select. Fortunately, there are numerous lenders who provide various loan products tailored towards any budget.

The typical Loan to Value  (LTV)  that most lenders quote is  65% – 75% LTV,  that means you as the house builder / developer have to put in typically 30% of your own money.  Most lenders want you to have some ‘skin in the game’  as they want you to be fully committed financially to the site and the building or conversion of the properties.  They want it to be financially painful fir you to walk away, as the last thing they want is a half finished site.

Interest Payments are typically ‘rolled – up’  by that it means the interest is added to the balance that must be repaid when the properties are sold.  it also make its easier in that whilst you are building you don’t have any monthly interest payments to make.  ( you can opt to ‘service’  the interest payments on a monthly basis, but you have to prove to the lender that you have your own cash income stream capable of affording the monthly payments )

Construction loans may not be for everyone, but they can be an invaluable resource when you need to borrow  £ Hundreds of thousands  or even £ millions of pounds to get your project off the ground. With these types of loans, you don’t need to worry about anything from initial design ideas to completion – from using a design & build contractor for construction of your dream home to working with local architects to make it a reality. No matter which route you take – conventional or unconventional – it’s essential that you find a lender who will guide you through the loan process and give you peace of mind that comes from knowing things are going smoothly.

Development finance – what are the typical interest rates charged

As with any type of borrowing, the interest rate you are charged will depend on your loan to value ratio. On average, these types of loans carry interest rates between 0.8%  to 1.5%  per month  and will typically run for 12 – 24 months.  Most development finance lenders are listed under short term lending, so typically the max term is 24 months , for them to get their money back.

Interest rates are usually calculated based on the amount of money drawn down at each stage of a development project. So you only pay interest on the actual monies drawn down at any one time.  eg  you could have a £2 million lending facility to build 4 houses,  but you initially only draw down £500k  to start groundwork and utilities etc,  therefore you would only pay the interest on the £500k actually borrowed. However, if you have an extensive initial advance, then this could significantly raise your cost of borrowing.

The type of project you are working on also influences the interest rate you receive. For instance, a high rise or commercial building development may attract higher rates than a residential one due to the higher risk / selling on..

When applying for a development finance facility, you will need to provide some details about the project,  

• the land / site value, 
• the current planning consents in place – eg outline or full ?
• the build costs 
• the expected timescale 
• the GDV – Gross development value  – ie  what you expect to sell the houses for once completed.our income and the amount of money you plan to draw down.
•  A clear cash flow model can help guarantee that the rates offered are reasonable and won’t cause financial strain during development.
• your experience as a developer

It is always wise to shop around for the best deal you can find, particularly with building development projects since they are highly regulated.  working with a broker such as quest finance, means we know who will lend on particular sites.

For instance, the building site must obtain the appropriate planning permit and each addition to the house requires its own build permits. All this adds up to a considerable amount of money.

When searching for a loan, it’s wise to consider whether you want a fixed-rate option or an interest only loan. A fixed rate option allows you to pay off your loan at a time that works best with your schedule and you can then enjoy lower interest rates throughout the duration of your project.

how can other assets be used to get 100% ltv

You can get  100% development finance if you have other assets  eg another house or plot of land  then that could be used as collateral instead of having to put any actual cash down, to get to a full 100% lending.  They would assess the site  and lend say 70% against that, and then leverage 30% of the loan against the other property or land, to get you to a total of 100% development finance.

A good credit score is also essential for lenders looking for opportunities. To maximize your financing possibilities, speak with a knowledgeable broker who can assist in identifying suitable lenders and explaining all available loans in clear English.

how pre sales of houses can boost lending

Pre-sales of houses are an increasingly popular way for developers to reduce their financing costs, assess the market value of their properties and protect against project pipeline risk and volatile market conditions. By utilizing pre sales a builder could get a 10% cash boost on day 1 of construction, this boost to the LTV  could mean they can pre order more timber frame kits or materials faster, which makes for a faster timescale, which will in turn , mean the builder can complete quicker and recoup the profits much quicker as well.

Lenders like pre sales as it gives them more confidence as to the exit route for the properties once buolt, as ultimately isll the lender is looking at is – when will i get my money back  and how guaranteed is it ?

One benefit of pre sales is that they offer buyers a fixed price at an early stage so they could get a bargain, by agreeing to a certain price and [paying down a deposit of say 20%  at exchange of contracts.

Investors may also benefit from this process as property prices typically increase during construction. This means buyers get a better return on their money than by purchasing a house when it is already finished and then reselling it once the market has settled down.