Development finance refers to a short-term loan aimed specifically at property developers. This loan is usually given for a period of between 6-18 months in total.
The loan itself is used to help with different stages of the development process: for example, build costs and purchase costs associated with a residential or commercial development project.
Whilst not regulated by the FCA, rules apply surrounding the Mortgage Credit Directive which include giving quotes in writing and a certain number of days so customers can make decisions.
What type of development can be used for the loan?
In terms of what development finance can be used for, there are a variety of different property types people use the funding for, such as for a conversion, a new build or refurbishment that simple covers a single unit, or multiple units that are built in a number of stages.
There are around 30 to 40 development finance lenders like Magnet Capital and over 100 brokers in the UK acting as introducers.
How does development funding work?
If you apply for development finance, the loan will usually be given in two parts. The first stage of funding is usually provided to the borrower to help them to purchase the development site (this could be an existing property or land where the property is intended to be built).
Meanwhile, the second part of the development finance loan will be given to help with the associated ongoing costs of the project.
With regards to the second stage of the development funding, it is very rarely given as a lump sum to the property developer, but rather in stages of the project. More money is released once parts of the project are completed. Typically, this will happen once every month.
How does the drawdown process of development finance work?
In most cases, money is released once a particular aspect of a project has been signed off by an independent monitoring surveyor (IMS). However, this can be dependent on a number of factors, such as the kind of project, the level of the build costs and the overall experience of the property developer.
The surveyor usually plays an important part in development finance, as they keep an eye on the project itself, making sure that the development is progressing on time and keeping within budget. They also alert the lender as to any problems that arise.
It is also worth keeping in mind that whilst the IMS will be acting on behalf of the lender, their costs will still be payable by the borrower.
By comparison, a bridging loan gives you the money upfrontand requires you to pay back the full amount at the end of the loan term.
How much development finance can I receive?
The exact amount of funding you can receive for your project will be dependent on a number of variables. This is determined by a professional valuation that considers the following:
- The current value of the site or the property prior to refurbishment
- The building costs
- The gross development value of the completed property.
In terms of the amount you could receive, this will depend on the lender, but it could be up to 70 to 80% of the current value, and potentially the entirety of the build costs.