About
When it comes to planning a significant renovation or property development project, there will be many decisions to make, with one of the first being the best way to fund the work. Large-scale building projects often require a substantial upfront investment to initially fund the work, and property development loans are an excellent option for those looking to borrow for this reason.
The majority of property developers need some form of finance, either to help take that first step into the property development market or to expand an existing property portfolio. There is a range of funding options available for property development, with many lenders offering various mortgages and loans specifically for this reason.
What is a property development Loan?
Property development loans are used for funding large-scale building projects such as renovation and construction. For smaller projects such as home renovations or property improvements, it is often better to look for other types of bridging finance. Large projects may require ground-up development finance, which includes funding to purchase the land as well as the construction work.
Like a bridging loan they are usually short-term loans to cover the length of the renovation project. Once the building work is complete, the loan is repaid through either the sale of the property or it is refinanced.
The Requirements
There is a vast range of lenders and brokers out there that can help you to find the best property development loan for you. The majority of lenders will use the land or building that is being renovated as security, and many will accept this as security even if planning permission for the work has not yet been secured.
Due to the property being used as security, most lenders will consider those with poor credit ratings. However, if you have a history of failed developments or missed repayments, the loan amount could be restricted or interest rates higher.
To obtain a property development loan, you will usually have to discuss the project in detail with the lender, including the estimated costs, end value, project length, profit margin and an exit strategy. Make sure you have all of this information to hand before making a property development loan application.
What can I receive with a property development loan?
Most property development loans start from £50,000 with no maximum limit. Loans for smaller amounts are often available but usually as a refurbishment loan or bridging finance as opposed to a property development loan.
The majority of lenders will establish the loan amount on a case by case basis depending on the value of the project. Usually, they will be roughly 70-80% of the build cost; leaving a significant amount to be funded directly. Loan terms are short and generally run between one to 48 months. Usually, this is just enough time to complete the project and either sell or refinance the property to settle the loan.
Interest rates and fees are very varied across the market. Rates and fees will depend on the loan size, personal credit history and the lender. On average a loan over £500,000 will be charged at a rate somewhere between 4.5% and 9% APR. On top of this, there are a number of fees associated with property development loans including arrangement fees, exit fees, broker fees, valuation fees and professional fees.
The Positives
- Quick access to funding to get started on the property development right away
- You can often make a decent and fast return by developing a cheap property using a property development loan and selling on for a profit
- You keep ownership of the property or land for the duration of the project
- No maximum limit on the amount that can be borrowed, it is completely dependent on the project at hand.
The Negatives
- Loans are usually only available for 70-80% of the build cost, leaving a significant amount to be funded by you
- If the loan amount isn’t repaid at the end of the agreed loan term, the property used as security could be repossessed and sold by the lender
- Interest rates and additional fees can be very high as the finance is short-term
- If the property market falls, you might not make as much profit on the development as first planned, leaving you at risk of making a loss.
Property development loans are complex and have a lot of varying factors. It is essential to properly understand the conditions before making an application. When deciding if a property development loan is right for your building project, consider all of your options. Whether you are purchasing land and starting from scratch or renovating an existing run down property, getting the right finance for a property development project is crucial to its overall success.
