The Ultimate Guide to Development Loans

Mar 13, 2024 | 0 comments

If you are interested in development finance and are looking for more information to determine whether it is the correct option for your needs, you’re in the right place because we have put together some key insights that will help to inform your decision-making process.

What is Development Finance?

Development loans are provided on a short-term basis to fund the refurbishment, conversion or construction of buildings. They are considered to be a secured finance option and can be used to finance property projects of all shapes and sizes. This means that development finance can be used for everything from converting retail units into apartments to purchasing undeveloped land to construct a large-scale energy-efficient development.

However, development loans aren’t the only short-term finance option and may not be the best choice for light refurbishment or redevelopment projects with no large structural components. As such, it is worth discussing your options with an experienced financial services provider.

How Does Development Finance Work?

A selection of metrics are used by lenders to determine the size of the loan that may be granted, including how much the building or site is expected to be worth when all development work has been completed, as opposed to traditional mortgages which are secured against the current value of a property or piece of land. This is why lenders request development appraisals early in the process to determine the project’s viability.

Generally, lenders will offer up to 65% of the gross development value. Different lenders have different minimum loan thresholds, however development loans typically start from £50,000. It is also worth noting that some lenders will only provide the best interest rates to borrowers taking out loans that exceed £1m.

How and When are Development Loans Repaid?

Lenders retain the interest on development finance which means that borrowers are not required to make any monthly repayments. Instead, once the development project is complete, borrowers are required to repay 100% of the development loan via refinancing options or the sale of the building/development.

Lenders will appoint a monitoring surveyor for the project, who will keep an eye on the progress of the development and provide support to the borrower as required. Monitoring surveyors will usually produce an initial report and then inspect the development on a monthly basis.

Costs Associated with Development Finance

When exploring your development finance options, it is important to be aware that there are some associated costs that you will need to factor in.

Lenders generally charge an arrangement fee, which is typically between 1% and 2% of the loan’s value. As development projects generally involve numerous professions, it is important to recognise that project managers, solicitors and architects will likely charge fees throughout the project. Notably, these fees can be accounted for in the total loan amount, which may be worth considering.

Lenders use a third party to produce the predicted site valuation and the appointed monitoring surveyor will also charge fees for every report they produce, the latter of which will usually incur a monthly charge throughout the development process.