Development Finance: Top Frequently Asked Questions
In our summarised FAQ, we take a look at the fundamentals of development finance from the perspective of a first-time applicant.
Development finance is a specialist type of secured loan, issued for the purpose of constructing, converting, renovating and repurposing properties. It is a strictly short-term facility, designed to be repaid within around 18 months of the issue date. Like most types of specialist commercial loans and development loans, development finance is typically granted exclusively to experienced developers and construction companies.
Q1. How does development finance work?
Development finance differs from a conventional mortgage in that the lender takes into account the estimated value of the completed property - not just the value for the development at the time the loan is issued.
A brief overview of how development finance works:
- The developer submits an application, complete with full disclosure of their requirements and detailed project projections.
- An offer is made by the lender to cover a proportion of the project’s costs, typically up to a maximum LTV of 85%.
- If the loan is approved, both parties sign the contract and become legally bound by its terms and conditions.
- The first instalment of the loan is then released, followed by subsequent instalments tied to the completion of key product stages.
- Interest accrues on a monthly basis at around 0.5%, and the loan is repaid in full on a predetermined date between 6 and 18 months later.
Q2. Who uses development finance?
Development finance is used by experienced developers and construction companies, who would prefer not to invest too much of their own capital in their projects.
By covering anything from 75% to 100% (with mezzanine funding) of a project’s costs, developers have the opportunity to run multiple projects simultaneously. This would not be possible if they invested all of their own capital in any given project, making development finance their preferred choice.
Q3. What paperwork do I need for development finance?
Documentation requirements vary in accordance with the nature and extent of the funding required. However, most development finance specialists will expect to see the following as the bare minimum:
- The value of the property at the time of your application
- The estimated final value of the completed development
- An overview of all construction and renovation costs
- A complete dissection of the project’s schedule and deadlines
- Extensive evidence of your experience and track record
- Examples of successfully completed similar projects
- Full disclosure of all providers involved in this project
- Confirmation of receipt of planning permission and permits
- Acknowledgement of any restrictions that may apply
Your broker will advise on all the necessary paperwork to submit your application, during your initial consultation.
Q4. Can I qualify for development finance if I have bad credit?
It is technically possible to qualify for development finance with bad credit, but you are unlikely to qualify for lenders’ most competitive deals. If you are concerned about your credit score (or general financial background), it is essential to consult with an independent broker to discuss the alternatives to development finance. A subprime product from a specialist lender could prove more affordable, depending on the type of property development project you have in mind.
