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Why you need funding - when you have finished your property development

Published on 26th September 2019 - Last update on 27th September 2019

Your property development project is finished. You’ve paid off the last trades and you are ready to put it on the market. You are probably looking forward to enjoying the profits, and perhaps to getting on to the next project.

But you may be making an expensive mistake. You may need to look at your finances immediately, to avoid paying out  £1000s more than you need to.

There are plenty of opportunities for property development, from simple refurbishments to innovative conversions, to complete newbuilds. Of course, all mean investing substantial sums of money to buy the property or land and to fund the work. With a proper itemised development plan - which should always include substantial provisions for unexpected contingencies - it should not be too difficult to raise the funds you need. 

At Rangewell, we work with developers across the UK to help them find the finance they need at the lowest possible costs. 

“Rangewell are the only answer you need when it comes to securing funding for development.”

However, we know that you cannot use a low-cost solution like a Commercial Mortgage for a property that cannot be occupied. With conventional mortgages, the property itself provides security for a cash loan. If something goes wrong and the borrower cannot keep up his or her repayments, the lender is entitled to take the property and sell it to recover the cash they have advanced. This means their risk is actually small - they can afford to offer relatively low rates of interest, often little above those provided for residential mortgage customers. 

When a property is being developed, there may be little or no value in it while the work is being carried out. Partial demolition and stripping out may mean the property loses any value it may have had, and may actually become a financial liability. 

The relatively high cost of Development Finance reflects the risk that the job will not be completed, which means the lender might not be repaid.

Property Development Loans

Property Development Loans typically offer:

  • 50 – 60% of the site/property value and up to 100% of the development costs
  • Minimum Loan Amount £150,000 (Lower by exception)
  • Maximum Advance 75% of total costs (up to 100% with additional tangible security)
  • Maximum Loan to GDV 65%
  • Term up to 24 months
  • Interest Rates between 0.95% - 1.35% pcm
  • Arrangement Fees Typically 2% based on facility amount
  • Exit Fees 1-month interest

Because of the risk to lenders, the costs of this type of Development Funding are high compared with a typical Commercial Mortgage which might run as 5% above base rate - which is why most developers who will retain their property as part of a portfolio will aim to refinance to a commercial mortgage as soon as their project is completed, and so becomes eligible for this lower-cost finance.

Not yet found a buyer for your property but still paying interest on your original borrowing? Don't take a low offer, find out if Development Exit Finance could be appropriate for your project first

You can’t take out a mortgage if you are planning to sell on

But what do you do if your exit strategy is to sell the property on? If you already have a buyer lined up, you might be able to spend a few more weeks on a high-cost Development Finance basis. But if your property might take months to sell, you cannot afford the extra cost this entails. Even if you are not making monthly repayments, the cost of your borrowing and the amount you must eventually repay will still increase month by month.

“Time is money. Spend too much time trying to sell a project while you are on high rate finance - and your profits disappear.”

Selling a project may be particularly difficult if the market is slow, or if you have several units to sell. You might even be forced to drop the asking price to get a quick sale. But there is a solution. If your property project is completed, Development Exit Finance can help provide a solution.

It can replace your existing working funding with short-term finance that is more affordable - giving you more time to get the price you want for your completed project.

Development Exit Finance could help you cover the costs of your existing lending at a more affordable rate, ensuring you can complete the job and sell the property when you are ready - and for the price it really deserves. 

Development Exit Finance

Development Exit Finance could offer: 

  • Up to 80% of your development value
  • Loans from £50k to £100m
  • No upfront fees 
  • Rates from 0.44% per month
  • Exit Fees 1-month interest

Why Development Exit Finance costs less than Development Finance

Development Exit Finance recognises that once your project is complete, it has a market value again and becomes suitable for lending at a lower cost than Development Finance. As a short-term loan, the interest rates may still be higher than those of a long-term loan, such as a mortgage, but they will be substantially lower than the high-risk funding required to fund your development.

Interest rates can be half that of Development Finance

So when your development project is completed, Development Exit Funding will allow you to pay off the high cost loan you had to arrange to fund the project itself. This will mean that the debt can be financed at a substantially lower interest rate and that there is no need to rush a sale or take a low offer.

Get on with the next project

A Development Exit Loan can simply pay off existing funding. However, it can do much more for you, by allowing you to access the full market value of your completed project. 

By using the profits you have created in your current project, it could allow you to pay off expensive finance - and have cash left over that you can use to put towards funding the purchase and paying for the work on your next project. 

This means you don’t have to wait until the sale of one project before you can start work on the next - helping you make better use of valuable time.

“We had built four homes in an old school. One sold right away, but the others were proving difficult. We got Exit Finance agreed, which cut our interest by more than half and, because it was based on the asking price of all three remaining, we had extra cash - which we used to buy a redundant church. We’re already starting work.”

How will you repay?

Monthly interest will be charged on Development Exit Lending, but it may be possible to roll up this charge, leaving you with no monthly repayments to make, as before. The property can then be sold, and the lenders repaid when you have achieved the price you want. 

If your exit strategy involves sales, and you believe you are going to reach the completion stage of your project without a customer ready to purchase lined up, it could be time to look at Development Exit Funding.  To find out more, call on the Finance Experts at Rangewell. 

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