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How does development finance work?

12.02.18

There is a lot of potential in development finance.

Buying a property at a low price then developing it can increase the value enough to make a significant profit, or allow buyers to renovate the property specifically for their tastes. But understanding exactly how it works is crucial to making a start on development project plans.

What can development finance offer?

There are several different kinds of development that can be financed, each targeted at different kinds of development. Smaller development might involve an aesthetic renovation with no structural work. This could either be for the occupier to better enjoy their property, or to raise the value of their property before they sell it.

Lenders will also consider applications for residential redevelopment where heavy structural work is required, such as extensions. These kinds of projects can drastically increase the value of a property. Some borrowers, however, are looking for finance for long-term investment purposes. Applying for develop-to-let finance is popular for investors looking to become landlords, where borrowers take a loan to renovate a property and, rather than sell it, rent it out.

Lastly, development finance can assist in the finance of large development projects. These range from conversion projects to a new build. The potential returns on these projects are huge and attract many investors, but it’s strongly advised that anyone considering a loan of this magnitude consults a broker, who could potentially save them tens of thousands of pounds.

How do I apply for development finance?

Development finance works differently to traditional mortgages. Usually, lenders assess the value of the property and then offer a loan based on that and the borrower’s eligibility. For development loans, lenders assess the predicted value of the property once the development project is complete.

To apply for development finance, developers must submit an application that details how much they paid for the property, the cost of the development and professional fees, and building timescales. Based on this information, they are given a list of terms from the lender that need to be agreed to before proceeding to a credit check. A bad credit rating will have a seriously detrimental effect on an application, so borrowers need to make sure they’ve checked it before they apply.

Even once the loan has been approved, the borrower will still be monitored throughout the project. It’s also important to note that the interest paid on the loan will be negotiated with the lender during the application process, so it can be difficult to gauge the final cost until later on in the application.

What paperwork do I need?

Paperwork is a huge part of any finance application, and development finance is no different. In fact, due to the loan taking into account the future value of the property, there is more paperwork than usual. Before talking to a lender, a developer needs to provide:

  • The current value of the property (if owned) or purchase price (if not)
  • The predicted end value of the property, with evidence
  • The building and renovation costs
  • The development time schedule
  • A portfolio or CV of experience in development projects
  • Details of any other professionals involved in the project
  • A copy of the planning permission
  • Details of building regulations
  • Any planning restrictions that might apply

Do I need a broker?

If you’re thinking about applying for development finance then, strictly speaking, you don’t need a broker. However, it’s widely considered a good idea. Each development is very different and as such, they are underwritten by lenders on an individual basis. A broker will be able to ensure that what a lender offers you is in your best interests. After an initial consultation, our experienced team will see that you are placed with the most appropriate lender to achieve your goals.

With a broker, you can expect greater clarity regarding how much your loan will cost and a deal that’s best suited to your circumstances. As early as possible, we can give you an indication of the interest rate and terms you can expect to be offered, and can make sure your application is seen by the lender best-placed to assist you. We also know exactly what lenders require in a project overview and can help you produce a well-crafted tailored proposal. Once the application is submitted, we’ll keep you posted on its progress and negotiate on your behalf where necessary.

 

If you’d like to know more about development finance and how we at Coreco can help you get in touch via our contact page – we look forward to hearing from you.