Friday, February 23, 2024
Latest:
Money

When should you use development finance?

Dominic Lill ,  ,  ,  ,  , 

In recent years, the development finance industry has grown exponentially, with more people deciding to use it as a funding option.

But what exactly is development finance, and when is it a useful finance option? We take a closer look.

development finance

What is development finance?

To give a brief summary, development finance is a short-term funding option (usually a loan for between 6 and 18 months in total) that can be used for a wide range of property development transactions. It can be used to fund many purposes, such as to help finance the cost of creating new build residential or commercial properties, to help buy land, or to help fund the cost of major refurbishments.

Development finance works differently to standard mortgaging products, as it is not a loan that is secured against the market value of the property, or the land that will be acquired, but instead the project gross development value of the project once it is completed.

Whilst not regulated by the FCA, there are rules and regulations that apply if it resembles a mortgage and includes things like lending against someone’s primary residence. Lenders and brokers also have to follow rules according to the Mortgage Credit Directive such as providing quotes in writing and giving customers a certain number of days to make a decision.

There are around 30 to 40 development finance companies in the UK including Maslow Capital, Magnet Capital and Masthaven, with around 100+ brokers who are looking to introduce business.

When is development finance used?

As we have previously mentioned, people decide to opt for development finance for a wide range of purposes. The most popular reasons it is used include:

  • To completely refurbish or renovate an existing property in order to then sell it and make a profit.
  • To buy a plot of land in order to create a residential, commercial or industrial complex.
  • To be able to convert a block of a commercial building into residential apartments, or into a mixed-use property.

How much finance could I receive?

Many development finance lenders allow you to borrow 50% to 70% or more of the current value of the site or property and may finance 100% of the build costs. Other things that can determine how much you will be able to borrow include:

  • The current value of the site: with planning or the value of the building prior to refurbishment subject to a professional valuation report.
  • The construction costs.
  • The gross development value (this is the total value of the completed project once all work has been finished).

How is it provided to the borrower?

Development finance is usually provided in increments to the borrower. The first stage usually involves given funding in order to be able to purchase the site or land that work is intended to be carried out on.

The second stage usually involves giving funding in increments, once different elements of the project have been completed. Development finance is very rarely given as one lump sum to the property developer but instead given in stages once parts of the project have been signed off by an independent surveyor.