With the property finance market on the rise again in the UK, many property developers are turning to development finance as an easy way to raise funds.
What is Property Development Finance?
In simple words, property development finance is a loan provided for the development or renovation of residential, commercial or both type of properties. Development loan is often granted to experienced property developers and builders, so they can raise the funds and use it to turn their building ideas into a reality. The development finance lenders will consider the potential value of the property while approving the loan.
People often confuse between bridging finance and development finance. Although they both have similarities, there are also a number of differences.
Bridging finance is particularly used when you want to:
- Purchase a property at auction.
- Buy a new home, but your old home hasn’t been sold yet.
- Raise finance for your business expansion.
But, when you apply for the development finance, you will particularly use funds for the property development purposes. That means property development finance is a specialist type of bridging finance in London that is suitable for those looking to:
- Build the property from the scratch.
- Cover the construction costs.
- Refurbish or extend the existing property.
What Can Development Finance Offer?
Development finance can be used for several purposes, and each of them targets different types of development. Smaller development may involve an aesthetic upgrade that doesn’t require structural work. The reason for the refurbishment could either be the occupier wants to raise the value of the property or just want to enjoy a new, better ambience.
Development finance lenders in London also consider applications where heavy structural changes are required. These types of development work can also considerably increase the property’s value. However, some borrowers may take out development loan for long-term investment purposes. Buy-to-let development finance is also popular among investors looking to raise funds to renovate a property and rent it out rather than selling it.
Development finance can also be useful in the large development projects. This ranges from heavy renovation work to building the property from the scratch. The potential returns on such projects are huge and it can be an attractive opportunity for many investors.
How Does Development Finance Work?
Unlike a conventional mortgage lender that considers the current value of your property, a development finance lender will instead take the predicted value of the completed property into consideration. The funds raised through development finance can be used to purchase the property or to complete the building work.
To apply for the development finance, the borrower must submit the details of how much they paid to purchase the property or land, the cost of the development and additional fees, and project timeline. Based on the details provided, the lender will assess the application on an individual basis and put forth their terms that the borrower needs to agree before proceeding to the credit check. Having a good credit rating can be helpful, but a bad credit score can have a detrimental effect on the application.
Even after the loan is approved, the borrower will be monitored throughout the term. It is also crucial to note that the interest terms will be decided by the lender during the process, so it can be difficult to determine the final cost until the last stage in the application process.
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What Documents Do I Need to Show?
Paperwork is a vital part of any financial instrument, and development finance is no exception. Due to the nature of this loan, you will require a sufficient amount of paperwork to support your application because the lender will take many factors into account before granting the loan. Before you apply for the loan, you will need to complete the following paperwork:
- The current value of the property
- The estimated value of the property after the development
- The cost of building or renovation
- The development timescale
- Experience of the property developer in the development project
- A good credit history
- Details of the professionals involved in the project
- Details of the building regulations
- Details of the planning permission
- Any restriction that may apply
If you have a poor credit rating, it is highly unlikely that you can use the development finance. That is because the lenders are very strict about the application process and credit history can demonstrate your ability to pay back the loan. It is advisable to bring together a team of professionals, such as a structural engineer, an architect or planning consultant to add credibility to your loan application.
How to Get Development Finance?
If you are applying for the development finance for the first time, you should know that it is relatively complex and time-consuming process. Therefore, you should use a financial broker to apply for the development finance. A financial broker can help make the entire process much easier and hassle free. Each application is different from another, and hence, they are assessed by the lenders on an individual basis.
A broker will review your application and make sure everything is in order and required documents are provided to increase the chances of approval. After the initial consultation, a broker will try to place you with the most appropriate lender to help you achieve your goals.
With a specialist broker, you can have much better clarity about how much funds you can raise, how much it will cost and secure a deal that is best suited to your requirements. Through a broker, you can get a rough idea about the interest rate and terms that you can expect in the development finance. A broker will help you create a well-crafted proposal that will simply increase your chances of approval.
Is the Development Finance Right for You?
If you are looking to raise short-term funds for your development project and you are confident that you will be able to repay the loan before the term ends, then the development loan is the most feasible solution for you, provided you have all the paperwork needed to get approved. If you need any assistance in applying for the development finance, get in touch with a specialist development loan broker who can help you go through the process smoothly.
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