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Ben Murphy, who looks after all aspects of commercial mortgages for JB Mortgages, is back to talk about development finance.
What is property development finance and how does it work?
Development finance is very similar to bridging. It provides you with the funds required to assist with the purchase and the construction or refurbishment of a property.
In certain cases there may not be a property standing – it may just be land. Development finance allows you to build properties on that land, provided you have the correct planning in place.
How much can be borrowed with development finance?
Typically, if you’re purchasing land you can borrow up to 75% of the land value. If planning is in place you may get 100% of the funds for the build, subject to affordability parameters being met.
The absolute maximum anyone can ever lend is 75% of the Loan to GDV – that’s the backend value: what you think it would be worth once you have built the site.
Can I get 100% development finance?
You can. 100% of the funds can be provided for the build if it fits the affordability requirements of the lender, and a suitable repayment strategy is in place.
Who is eligible for development finance?
Anyone can get development finance – including first time developers, in which case there’s more due diligence required on the builder. Anyone has access to it subject to the project being suitable.
How much does development finance cost?
Development finance costs are similar to bridging. The typical rate would be 1% per month with a 2% arrangement fee. But each case is different. It could be more, it could be less. It depends on a number of factors, including experience, the project itself and the Loan to Value.
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Everyone’s different. You might be self-employed. You might have some credit history issues – whatever your situation, we will find the most suitable product available to you from across the whole market.
When do I need to repay a development finance loan?
You need to keep within the term that was set originally. Most development finance loans typically last 12 months. For larger projects that could be all the way up to 36 months, but the loan would need to be repaid as soon as physically possible.
This is an expensive way of borrowing, and the longer that you sit on a loan, the smaller your profits will be on the back end.
How do you apply for development finance?
Always speak to a broker. We know development finance and which lenders to place you with. We know your circumstances and how to present you as a customer to the right lender – so yet always speak to a broker for advice.
What if I have bad credit? How does this affect getting development finance?
Each case is different. It’s not an issue as long as there’s a suitable repayment strategy in place. What it may affect is whether you’re looking to refinance on a Buy to Let mortgage. In that case a lot of due diligence will need to be done up front. A Decision in Principle will be provided by us as your broker to ensure you’re able to repay that loan.
Can you give an example of a client you’ve helped with development finance?
The current trend is for auction purchases. A lot of our clients are buying at auction to get a property that needs to be refurbished. We get them a bridging loan which we spoke about. previously – it’s very similar to development finance. That assists with the purchase.
The lender will then also provide 100% of the refurbishment costs. So you get the fast finance and then 100% of development finance to update the property and increase its value.
What’s the difference between a bridging loan and development finance?
A bridging loan assists with only the purchase. Development finance assists with both the purchase and the development costs.