Property Development Finance: funding scaled for your business plans

What is development finance?

A development loan is a form of short term lending, usually between 6-24 months. It is designed to help with purchase costs and build costs for residential and commercial development projects. 

This can be anything from a new build, conversion, or a refurbishment covering a single unit through to multiple units built over several phases. 

How does a property development loan work?

A developments finance loan will come in two parts. 

Part 1: The purchase of the site
The first part of the loan will be used to assist with the purchase of the developments site. This could be where several properties will be built or an existing property that will undergo refurbishment.

Part 2: The building costs
The second phase of the loan will be used to pay for the build costs associated with the project. This will usually be drawn in stages instead of being given in one amount at the start. This will typically happen once a month as work is carried out on the project.

Will I qualify for development finance?

The development finance criteria will vary from case to case and lender to lender. However, Rnagewell will make efforts to find the best deal for your business needs and project. 

Typically, the general rule of lending criteria will be based on the following:

• Loan size of £30,000 with no upper limit
• A term of up to 24 months
• Interest rates from 7% p.a
• In some circumstances, an exit fee may be payable
• LTV up to 75% of the land purchase and 100% of the build cost
• A valuer appointed by the lender will undertake a valuation of both before and after the development and establish the value once the property has been built. 

How much will development finance cost?

It's important to note that each lender will have its own pricing structure - the difference in costs can be vast, even where the headline rate charged is identical. This is because loans are priced on a case by case basis. So shopping around is the only way to ensure that you are getting the best deal. Rangewell's specialist brokers will do this for you. 

If you're a first-time developer, you should expect to pay a higher rate on your first project. Any developments that you carry out after will be charged at a lower rate. 

What is the interest rate on a property development loan?

Before committing to development finance, you'll need to know how much the interest rates will cost you. Interest rates offered by lenders will vary across the market. Experience, loan amount, the site location, and loan amount as a percentage of the gross development value will play a role in deciding what rates will be charged. 

Loans below £500,000: Typically, loans will start at around 6.5% per annum, but these may be exclusive to the more experienced property developers. A rate of about 9% per annum may be more common.

Loans above £500,000: A loan with a gross development value below 70% will likely be 4.5% to 7.5% per annum. Again, this depends on the lender. 

For smaller or higher risk loans, you should expect a rate between 0.85% and 1.35% per month.

A rate of 6.5% to 7.5% is standard for most applications on loans over £1,000,000. Speak to Rangewell today to learn more about the rates available to you. 

What type of development finance is available?

Property development lending is designed to provide the scale of funding you need - and help you access it fast.

It ranges from small-scale funding for individual domestic refurbishments to complex finance for major mixed-use developments providing multiple new homes and may be available whether you are a sole trader, limited company or LLP.

Redevelopment Mortgages

Redevelopment mortgages may be available for homes that are basically habitable but may require extensive modernisation.

Refurbishment Bridges

For light and heavy refurbishments, you might want a 'Refurbishment Bridge' finance option, which funds 6–24 months of building costs and may include the option to convert into a mortgage once work is complete and signed off.

Property Development Loans

Property Development Loans are a type of short-term lending to finance a renovation or refurbishment of a property. It can cover three types of projects.

These are:

• Small-scale loans to cover light refurbishment
• Lending to cover renovation and major conversion projects
• Funding for ground-up development, starting with an empty plot of land

50 – 60% of the site/property value can be advanced with additional stage payments available throughout the build at intervals agreed at the offer stage. Loan terms are flexible from 1 – 12 months and arrangements with no monthly interest payments may be available.

Loans are also available to fund up to 100% of the development costs.

Major development funding

For more extensive projects and ground-up developments, you may need a more complex finance arrangement.

Funding is often sought by those who already own land, and who will offer it as security to raise funds to cover both land purchase and building costs.

However, experienced developers may be able to secure partial funding for the purchase of land as well as development costs.

Lenders can provide up to 60% of the Gross Development Value or GDV.

Lenders may expect at least 40% equity of the GDV to be funded by the client with the acquisition of the site. Funding will then be provided on a phased basis to cover the costs of development or redevelopment. Very large multi-unit block developments may require pre-sale of each phase before funding can progress to the next stage of the project.

Lending arrangements can include a roll-up of interest and associated costs into the loan, which would be paid off once the development is sold.

Why you need Rangewell to find finance scaled for your projects

Not all types of deals may be suitable for all circumstances, or for all prospects.

Knowing the most suitable types of funding can mean saving valuable time as well as reducing costs. At Rangewell, we work across the property development sector, and can work with you to understand your needs and the potential of your project.

Then we can suggest the most appropriate ways to provide the funding you need Getting the property finance that is right for you Finding the right lender for your development projects can be crucial to its success and profitability. That's why it is important to speak to the Rangewell team without delay. It means getting the support of an expert team with personal experience both of development and the challenges you face, and in finding the financial solutions for them.

We can help with a range of property funding, including:

• finance for holiday lets
• finance for property developers
• high value bridging loans
• refurbishment finance
• development exit finance

We can discuss your objectives, and help find answers scaled to fit your business as it grows. When you call us, we can explain your funding options – and find you the solutions you need fast.

How does development finance pricing work?

Development finance is different to a traditional mortgage. Lenders will assess the value of the property and then offer a loan based on the borrower's eligibility. 

For development loans, lenders will assess the predicted value of the property once the development project is complete.

Example of property development finance in practice

Let's see how property finance works in practice. 

A client will buy a site for £1,000,000 and will build 12 x 3 bedroom houses. The overall build cost will be £1,800,000 and is estimated to sell for £4,600,000.

The client will need to borrow both to fund the purchase and finance the entire build cost. In this case, a lender will likely lend 70% of the purchase of the site and 100% of the build costs. By lending  70% of the purchase price and 100% of the build costs, the client will be eligible to borrow £2,500,000. This figure is just under 90% of the total project costs. 

The £700,000 required to complete the purchase will be released upfront, and the remaining costs will be released over the term. 

The final step would be to ensure that the borrower will fit the lender's loan to GDV calculation. If they do, they will move forward with the application.