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Development finance is a specialist facility for experienced builders and property developers, with an established track-record in the field. Unlike a conventional property loan or mortgage, development finance is issued in stages as the project progresses.

But what are the main applications for development finance in practice?

While development finance can be used for a broad range of purposes, most loans are issued for projects that fall within one of the following three categories:

1.  Construction or Conversion of a Property

The most common application for development finance is to fund the construction of a new residential or commercial building. Developers seek the support of development finance specialists to fund extensive and ambitious development projects, typically with a maximum LTV available of 70% to 80%.

Funds are released in stages as the project progresses, until its successful completion. At which point, the development may be sold to raise the funds needed to repay the loan in full. Another option is to transition the development finance loan to a longer-term facility (like a commercial mortgage), enabling the developer to repay the balance gradually over the course of several years.

2. Development Exit Loans

A development exit loan is a bespoke facility issued to enable a developer to repay an existing development finance loan upon completion of the project.  This can be a useful facility in the event that a suitable buyer for the development has not yet been found, or if there is a holdup in the process of selling the development for any reason.

Development exit loans can help developers sidestep issues related to development finance loans going beyond their agreed completion dates. As development finance is designed to be a strictly short-term facility, it can quickly become expensive if not repaid promptly. Using a development exit loan to repay a development finance loan can enable the borrower to avoid the risk of defaulting on their debt.

3. Refurbishment Finance

Refurbishment finance is issued to cover the costs of substantial renovations or improvements to a property, prior to it being sold or let out. The developer will typically already be the owner of the property, and will therefore simply be looking to fund the required renovations.

A refurbishment finance loan will usually be issued with a maximum LTV of 60% to 70%. Refurbishment finance is secured by a first charge over the property, charged at a monthly rate of interest which can be rolled-up for repayment at a later date. As with the other types of development finance, refurbishment finance will usually be issued in a series of instalments as the project progresses.

Getting the Best Deal on a Development Finance Loan

In all instances, getting an unbeatable deal on a development finance loan begins with enlisting the support of an experienced broker. Along with providing the help and support you need to choose the right type of development finance, your broker will negotiate the best possible deal from a panel of approved lenders.

Author: Craig Upton

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