Development finance is a specialist funding solution for property construction and development projects, typically issued exclusively to experienced developers with an established track record.
As the name suggests, high-end development finance is simply a sub-category of development finance, concerning the funding of advanced and ambitious projects with comparatively high costs. Other than the size of the loan issued, high-end development finance works in the same way as all other types of development finance.
How Does Development Finance Work?
Most property developers fund their projects externally, typically covering as little as 5% of total project costs out of their own pocket. This enables them to take on larger-scale projects of a higher value, reduce their overall financial risk, and conduct multiple projects at the same time.
The funds are issued in the form of short-term bridging loans, typically repayable within 6 to 24 months. The lender transfers the balance of the loan by way of a series of instalments, tied to the completion of specific phases of the project.
Interest is charged on a monthly basis (often around 0.5% or less) and the full balance of the loan is repaid in a single lump-sum payment on or before an agreed date. The borrower may sell the development (in full or in part) to raise the funds needed to repay the loan or transition their development finance loan onto a longer-term repayment product (like a buy-to-let mortgage).
What Types of Development Finance Are There?
Development finance can be used for almost any legal purpose within the property development and construction sphere. Even so, the four broadest categories of development finance are as follows:
- Ground Up Development Finance – Used to fund the construction of new homes and commercial properties from scratch.
- Heavy Refurbishment Finance – Issued to cover the costs of major property refurbishment and renovations, such as extensions and loft conversions.
- Light Refurbishment Finance – Typically used to fund smaller-scale projects that are more aesthetic in nature, and can be conducted without applying for planning permission.
- Mezzanine Finance – A supplementary financial product used to ‘top up’ a first-charge development finance loan and cover more of the project’s costs.
All development finance products are unique, with terms and conditions tailored to meet the exact requirements of the applicant.
How Much Can I Borrow?
Maximum loan values vary from one lender and case to the next but are typically capped at between 65% and 75% of the project’s total costs. However, this initial first-charge development finance loan can be topped up with second-charge mezzanine finance, potentially enabling a developer to cover up to 100% of all project costs externally.
The amount any developer can borrow will be determined by a multitude of factors, including the value and viability of their proposed project, their financial status at the time of their application, their track record in the field and so on.
What Are Typical Development Finance Costs and Charges?
Development finance costs are always subject to negotiation and differ significantly from one lender to the next. Examples of the typical fees and charges payable include the following:
- Interest payments: interest applies on a monthly basis, often at a rate of around 0.5% or less.
- Arrangement fees: some lenders impose an arrangement fee of anything from 1% to 3% of the total value of the loan.
- Lenders can charge a fee of between 1% – 3% of the loan amount.
- Valuation fees: an approved surveyor will need to be hired to conduct a formal valuation of the property, and provide an estimate of its projected future value.
- Legal fees: solicitors will also be hired to handle the legal and contractual aspects of the transaction on behalf of both parties.
- Drawdown fees: some lenders implement a set fee or commission at the time each instalment of the loan is transferred to the borrower.
- Exit fees: a final fee payable at the time the loan is repaid, which with some lenders can be higher when development finance is repaid early.
- Broker fees: development finance brokers will typically collect their fees from the loan issuer, and charge the borrower nothing for their services.
For more information on any of the above or to discuss any aspect of development finance in more detail, contact a member of the team at UK Property Finance today.