Presented by KIS Finance
Currently, we’re experiencing something of a blip in the construction industry. According to year-end projections for 2024, new work is estimated to have contracted by 4.9% as the industry faces significant economic headwinds.
Despite this, the sector has immense opportunities. According to housing market experts, house prices were supposed to stagnate and fall in 2024, but they’re projected to have grown by 3%. Yet financing remains problematic for developers looking to take advantage of rising real estate prices.
In this guide, we’ll explore some of the ways you can cut your development finance costs.
Borrowers have been punished over the last couple of years, with the Bank of England raising its base rate 14 consecutive times from 2021 to 2024. Although the base rate has dropped below 5%, this hasn’t impacted the financial markets like how many developers expected.
The latest news is that NatWest has increased its fixed-rate mortgage tariffs, following other major UK banks. Naturally, these rises impact every part of the property sector, with developers also feeling the pain. But why have rates continued to rise?
Uncertainty in the markets has meant lenders have acted to protect themselves against potential volatility. Moreover, concerns over increased tax and business costs emerging from the 2024 Budget have led to lenders raising their development finance rates instead of decreasing them.
In this complex lending landscape, developers must work overtime to source favourable financing arrangements.
Residential and commercial lenders alike have benefited from constricted UK housing supply and rising demand. For example, from November 2023 to November 2024, private rents increased by 9.1%.
However, taking advantage of the current market relies on sourcing affordable development loan rates. Let’s investigate some of the best tips for lowering your borrowing costs.
Development financing operators are in a competitive market, meaning they’re in an ongoing war to win your business. That’s why you’ll find varying interest rates, fees, and other terms that could impact your overall borrowing costs.
Take the time to explore the market and see what deals are available. Never choose the first lender you come across. Identify a shortlist of offers and dig deeper into the terms to ensure you’re getting the most suitable financial product for your project.
An alternative to spending time sourcing lenders is to work with a dedicated development finance broker, like KIS Finance. Brokers do all the heavy lifting by understanding what you’re looking for in a loan and matching you with the lenders from their networks.
Relying on a broker as a middleman doesn’t just save you time. Still, it increases your chances of finding a lender offering the lowest costs because brokers understand the broader UK lending market better than anybody.
Lenders will often advertise their best rates, but what many borrowers forget is that these rates are designed for lower-risk borrowers. The rate you’ll actually get depends on the strength of your application and your risk profile as a borrower.
A lender only cares about two things:
Doing everything you can to reduce your inherent risk as a borrower will unlock the best possible rates from your chosen lender. This comes down to your experience and proposed project.
For example, make your development plan as detailed and realistic as possible. You can never have too many details. Moreover, don’t be tempted to exaggerate the profitability of your project because these lenders rely on experts with substantial knowledge of the development market to make their decisions.
All lenders prioritise the projects with the highest margins and the lowest probability of failure. Although your credit score will come into play, your creditworthiness is less important when taking out a development loan when compared to a conventional mortgage.
Fees are a natural part of applying for and securing a loan, but borrowers often forget that some lenders may be willing to adjust these fees. It’s not uncommon for experienced developers to save on costs further by working with a lender and requesting that fees be either reduced or eliminated entirely.
Of course, challenging fees isn’t something you’ll be able to do with high-risk projects or if you lack a robust track record in the property development world. Instead, you might want to consider bundling costs into the loan principal to ease the impact on your cash flow.
Development loans are always secured against an asset. Typically, it will be secured against the project you’re tackling, but no rules exist on where the collateral has to come from. Some developers secure their loans against existing properties in their portfolios to get their costs down.
Likewise, you can leverage your assets further by adding more than the minimum collateral. Higher equity contributions lower your overall loan-to-value (LTV) ratio. Getting your LTV down to 40-50% usually results in the very best rates from lenders.
Note that putting forward some extra collateral is also a popular option for increasing how much you can borrow in total. Most lenders don’t have maximum lending amounts and rely on the LTV instead. Offering more collateral lowers your rates and increases your borrowing capacity.
Remember, when adding assets to your loan deal, you must bear in mind the risk of losing those assets if you can’t afford to repay the loan for one reason or another.
It’s not what you know but who you know.
This principle applies to the property sector like it does anywhere else. Experienced developers often fund their projects using the same lenders repeatedly. Establishing trust with a regular lender pays dividends in the long term because, with every successful project, you reduce your overall risk profile.
Not only does this open the way to potentially gaining “most favoured nation” rates from lenders, but it can also build confidence capital by encouraging your lender to fund riskier propositions or provide higher loan principals in the future.
Interest rates are often the biggest concern for property developers – and for a good reason.
Your rates make up the bulk of your costs, but when dealing with millions of pounds in credit, any savings you can make elsewhere adds up to thousands of pounds. That’s why how you borrow and use your loan can make an enormous difference.
Here are some tips to manage your development loan to cut costs:
Refinancing your loan comes with its own costs. Essentially, refinancing means you’ll be repaying your development loan with another loan. In most cases, this is a short- term bridging loan to finish the project, but it could also be another development loan.
On its own, refinancing isn’t a bad thing. Plenty of developers refinance into other financial products to deal with unexpected delays or when they want to keep the finished development on their books.
However, project profitability is often impacted because developers fail to stick to their timelines, don’t borrow enough money, or underestimate how long a project will take to finish and sell.
Go back to your original plan, ask yourself whether your timeline is realistic, and factor in the costs of the worst-case scenario where you’re forced into refinancing to pay back your development loan.
Typically, you want to refinance as little as possible. Additionally, if you anticipate refinancing, try to refinance later into the project. The midway point is a good time to refinance because as the project progresses, the overall risk of it not being completed decreases, which could give you better rates.
It’s also worth approaching your development loan provider since many of these lenders also offer bridging loans or development finance refinancing. Since you’re already their client, you may receive favourable rates by refinancing with them.
Early repayments are a powerful strategy for reducing your premiums. Repaying your loan early reduces how much interest builds up, allowing you to get rid of your liabilities at a decreased cost.
But it’s rarely as straightforward as that.
Lenders don’t want you to repay your loan early because it means they ultimately make less. That’s why most development loans will have early repayment fees attached. Do your research to find lenders with more flexible repayment options, allowing you to repay your loan early.
Once you’ve secured a more flexible loan, focus on optimising your cash flow to make regular early repayments. Ensure it coordinates with your project so you don’t inadvertently damage your cash flow.
Lending costs are an unavoidable part of being a UK property developer. However, choosing your lender wisely lowers your costs and could put thousands of pounds back into your pocket. The best way to get the best deals is to team up with a broker like KIS Finance.
We’ll learn more about your project and what your priorities are. By leveraging our vast lending network, we’ll connect you with the lender that most suits your parameters. To learn more about how we support the UK’s property development sector, contact KIS Finance and launch your loan search today.
Several options exist for reducing how much you pay in interest. Shorten your loan term so that you’re not holding the debt for too long, and only draw what you actually need. If possible, consider repaying your loan early, but beware of the impact of any early repayment fees the lender imposes.
Keep an eye on the market and work with a broker to monitor what’s going on in the broader development finance market.
The answer is to improve your credibility as a borrower and reduce the risk profile of your project. Writing a detailed business plan, demonstrating your experience, adding more collateral, and showing financial stability increases your bargaining power and chances of negotiating better rates.
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Last updated: 09 January 2025 | © KIS Bridging Loans 2024 | Terms & Conditions
