Development Finance
Development Finance is a type of funding that facilitates the conversion, construction, or renovation of buildings. It is a short-term loan that designed to fund a project for the duration of the building works necessary.
Quick access to funding for development projects
Can finance off Gross Development Value
Only pay interest on the amount you actually use
No need to tie up your own capital in development projects
Interest roll up – no need to worry about monthly payments
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Projects requiring Development Finance
Ground Up Construction
If you are looking to build property, construction will require development finance. This type of loan is for those who are looking to build an entirely new property.
1
Refurbishment
If you are looking to carry out a refurbishment, property refurbishment finance would be the most suitable option. These loans are applicable to anything from light refurbishments through to structural alterations, extensions, and reroofing.
2
Conversions & Heavy Renovations
These projects are usually financed through property refurbishment finance. However, if the works required are particularly large or complex, development finance may be more suitable.
3
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Want To Know More About Development Finance?
Can't find the answers you need below? Speak to one of our experts today, we're happy to help!
What is Development Finance and what can it be used for?
There are different types of Development Finance, and the suitable product is dependent on the project. For this reason, we recommend getting in touch with one of our expert financial advisors who will quickly be able to assess your needs and find the best product for your venture.
Development finance is typically released as two parts, the first part is released as lump sum to purchase the site, and the second part is released in stages to finance the necessary works.
What is the Max Loan To Value?
Dependent on the lender and circumstances of the project, but can be up to 70% of the gross development value.
Is It Expensive?
Interest rates vary depending on multiple factors such as development experience as well as credit scoring factors, but typically range from about 0.85 to 1.1%.
Development Finance - Further Details
What is the application process?
After the initial application is submitted, the lender will send out a monitoring surveyor to have a chat with you (or your project manager) to go over your schedule of works and costs involved.
This discussion will be to determine the scheduling of funding to ensure your project can be completed as efficiently as possible.
Once this has been agreed, an assessment of the current value of the plot/property will be carried out as well as a calculation of what the plot/property will be worth once the works have been completed.
This figure (GDV) is the amount your loan will be based on.
Gross development value (GDV) is a valuation metric that most property developers and investors will be familiar with when calculating financial returns on property development projects.
The Gross development value of property investment projects is an estimate of the final value of that property once the planned development works have been completed.
Lenders will use the Gross Development Value to calculate the maximum amount they’re prepared to lend.
This could enable you to secure a property at a lower price, and use the extra amount loaned to complete the necessary works which subsequently increase the property value at the point of refinancing.
What is Gross Development Value?
A unique benefit of development finance is the way in which interest is paid, or serviced, by the borrower. Unlike a traditional mortgage or loan where a borrower makes a monthly interest payment, most Development Finance lenders will add the interest to the loan, meaning that the borrower will not have to make any payments to the lender for the first 12 or 24 months.
You will also only pay interest for the period of time that the funds were borrowed, so early repayment of the loan would result in a reduction in the amount of interest paid.
When the property is sold or refinanced, the original Development Finance plus any accrued interest will be payable in one lump sum from the proceeds. This helps with short term cash flow, meaning you will not need to worry about budgeting for monthly repayments whilst you await your permanent finance solution or property sale.
How is the interest paid?
Both Bridging and Development Finance are short term loans.
However, Development Finance - unlike Bridging Finance which is paid out to you in one lump sum - is often paid in installments, in line with your schedule of works.
What is the difference between Development Finance and Bridging Finance?
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Self Build and Development Finance
There are different types of Development Finance. Firstly, there is Self Build finance, this would be applicable to personal projects such as building your own property.
Then there is Development Finance, which is used for investment and commercial purposes, for example, if your intention is to sell or let the completed project.
Once the type of finance for your project is determined, your broker will assess which product is best suited to your project.
Three Reasons To Choose Development Finance
Quick access to funding for your development project
1
Drawdown facility – you only pay interest on the amount you’ve used so far – you don’t pay interest on money you haven’t used
2
Carry out projects without tying up your own capital
3
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*Representative example: If you borrow £255,000 over a 25 year term on a fixed interest rate of 4.41% for the first 2 years, followed by 7.65% variable for the remaining term, your monthly payments for the initial 2 years will be £1,408.51. Representative APRC of 7.3% variable. The total amount of interest and captial you'll repay over the term of the loan will be £553,892.20. This example includes £1,124 of fees in total, which may be payable to the lender or to Finamply.
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