Different lenders will have their own definition of light and heavy refurbishment, but generally:
Development finance can be used to finance both the land purchase, and also the build costs.
The highest loan to value development finance plans will fund up to 70% of the land cost and 100% of the build costs, provided the loan amount does not exceed 70% of the gross development value.
However, facilities that offer as much as 70% of the land cost and 100% of the build cost, are specialist. Therefore, their interest rates, set up and exit fees, usually all carry a premium, along with also having stricter underwriting criteria.
To obtain the best deals it is best to restrict development finance facilities to 60% of the land cost and 100% of the build cost.
A plot of land with planning permission to build four, three bed detached houses. The land can be purchased for £250,000 and the cost to build all four houses will be £400,000.
The estimated value of each house is £250,000 meaning a Gross Development Value (GDV) of (4 x £250,000) £1,000,000.
Development finance can be used to raise up to 70% of the land cost = £175,000 and all of the build cost.
Therefore, a facility would be set up for £575,000 (net). The initial release would be for £175,000 and used to help fund the purchase of the land.
The remaining £400,000 will be released in stages as the build progresses.
With most facilities interest is only charged on funds that have been drawn.
When looking at how much you can borrow you will need to factor in:
You can normally borrow 70% of the land/site cost and 100% of the build cost.
Increased borrowing including 100% development finance is possible.
Payments will usually be made in stages as the project proceeds.
Most development finance facilities are set up to allow monthly interest charges to be added to the loan facility. The interest is then repaid when the loan is redeemed.
Having the interest added to the facility takes pressure off the developer so that they can concentrate on the development.
Obviously if units are sold during the course of the development, some or all of the proceeds will be used to reduce the amount outstanding on the development finance facility.
When undertaking a development project, income is not generated each month, only when the completed development or units within the development are sold. Therefore, there is no regular monthly income, so easier to allow payments to be added each month rather than missed, leading to potential loan default problems.
All lenders will want to see a clear exit plan before they will agree your loan. The most common exit routes are:
For every month a development finance facility is outstanding interest charges are being incurred.
Developers will therefore want to limit any delays and ensure any development finance is repaid as quickly as possible.
Development projects are usually repaid through sale or refinance:
Build to sell – when the developer sells the completed development, either as a whole, or as individual/multiple units
Build to rent – which is when the developer refinances the completed development, upon its completion, onto a long term facility, enabling the property developer to rent the new property out.
Or a combination of build to sell and build the rent – this is when a developer sells off some of the completed units and also keeps a number of the units for themselves, in order to rent out as investment properties.
Development Exit Finance enables you to repay any development finance before the sale of the development has been completed. The main reasons for doing this are:
Exit finance is often a short term, low cost bridging loan
Even if you are in the fortunate position of being able to fund a development project yourself, there are still clear advantages to using development finance for at least a proportion of the costs.
Advantages of using development finance:
Last updated: 22 November 2023 | © KIS Bridging Loans 2020