What is Development Finance?
With a plethora of funding options available Charter HCP takes a closer look at development finance which is for… you guessed it, development.
What is Development Finance?
Development finance is a form of lending that is used to finance the conversion, heavy refurbishment or construction of anything from a single dwelling to multi-unit sites.
As with bridging finance there are multiple applications ranging from residential and commercial properties to the financing of the purchase of development land.
Development finance loans are generally used for short periods and on completion the loan is usually repaid through the sale of the property or refinance.
Loans typically last for 3 to 24 months and range in value from £50,000 to £25m+.
How Much Can You Borrow?
Development finance loans are based on gross development value (GDV), which is what the property will be worth when all the planned works have been completed.
These costs are broken down into two parts – construction and land costs.
The construction costs covers all the physical building work required such as materials, architects and contractors.
The land costs refer to the purchase of the land itself, whether that be an existing building or new plot of land.
Types of Development Finance
Residential Development Finance
Residential development finance is used for the development and or renovation of residential premises.
This form of finance can be utilised to fund ventures from a single unit to projects involving the construction of hundreds of units.
Commercial Development Finance
Commercial property development finance is available for the construction, by developers or business owners, of new commercial properties.
Joint Venture (JV) Development Finance
This allows a developer to access 100% of the required finance. A lender provides all the funds needed to complete the project and profits are split on the sale of the site.
Profits are usually split 50:50 but different lenders will charge interest rates anywhere from 8% – 21% on the drawn down but will split the profit in your favour slightly.
The deal is dependent on the lender and Charter HCP will work with you to achieve the best possible outcome.
How Much Does It Cost?
Interest rates start at 6.0%PA, although rates vary on a lender-to-lender basis. Other factors that may impact the rate include loan-to-value, security, credit history and affordability.
Additional fees are involved when buying and building a property such as valuation fees, solicitor fees, stamp duty and insurance.
There are different repayment options available and whilst some make monthly repayments, the majority of borrowers tend to roll over all their interest repayments until the end of the loan term.
Isn’t This Just Bridging Finance?
There is a distinguishable difference between development finance and bridging finance.
Bridging is used for purchasing the property, but development finance is better suited to making renovations such as refurbishments, rebuilding or building from the ground up.