Property development finance is typically used for large-scale building or renovation works.
This could include new residential housing projects, commercial construction for office blocks or warehouses or projects taken on as part of regeneration initiatives. It is not suited for smaller-scale developments such as home improvement works.
Whether you’re buying property to refurbish or purchasing land to build on, there’s a wide range of financing options available to help you get your plans off the ground. However, even for the most experienced developers, navigating the lending market can be a minefield.
Our construction and engineering lawyers work closely with our financing specialists to provide bespoke advice to property developers and investors. To help you get started and determine the best vehicle for managing and funding a project, we’ve put together the following guide to property development finance.
In this guide:
- How to finance property development in the UK
- How to choose the right financing option
- How can I apply for development finance?
- How much can I borrow?
- Legal advice for property developers
How to finance property development in the UK
When planning a property development, having the right finance in place is paramount to the success of the project. Without it, cash flow throughout the construction phase can be squeezed and impact the profitability of the development. To ensure the highest possible return on investment, it’s critical to secure access to the funds necessary to support the project.
There are various methods of finance for property development, and the type you choose will depend on how extensive the work will be. So, what is the right option for you? Like development projects themselves, development finance comes in many forms.
A popular option for property developers is to use short-term bridging finance for the purchase of the land and the build cost, before switching to a longer-term loan or commercial mortgage.
To help you make sense of market and budget for your project, we’ve listed the most common types of development finance below:
Land mortgages
Although lenders tend to see land finance as a risky proposition, a strong application backed by planning permission and a proven track record could work in your favour. Getting a land mortgage to fund commercial property development is fairly straightforward, but it’s worth keeping in mind the high interest rates that typically come with such products.
That said, a plot of land that has been granted planning permission for the build of several residential or commercial properties will be looked upon favourably be lenders due to the profit that the project will return.
When applying for land finance, lenders will require a detailed financial plan comprising of cost projections, intentions and end goals, timescales for construction, materials used and labour cost. The more transparent and detailed your application, the more confident the lender will be in financing the project. In this case, there’s no such thing as too much information – depth and clarity will strengthen your case and help you to secure the funds you need to get started.
Land mortgage costs
Land mortgages usually require a deposit of around 20% of the land’s value. Certain lenders may be willing to agree to smaller deposits, but this will ultimately depend on the property developers experience, history and the plan supporting the project.
Land mortgage rates
Mortgage rates will typically be offered at an average rate of 4.0%, although the rate provided will be determined by the intended use of the land, experience of the applicant and the affordability of the project. Land mortgages tend to be considerably shorter than conventional mortgages, lasting around five years or under on average.
Land mortgage fees
Just like high street mortgages, there are several costs associated with the application of land mortgages, including application fees, valuation fees and legal fees.
Application fees do as they say on the tin, covering the cost of your land mortgage application. You can also expect to pay a valuation fee to the lender so that the land can be checked by a qualified surveyor.
Cost savings can be made on legal fees by opting for a law firm that charges fairly and according to the calibre of their lawyers as opposed to the location of the firm. A lender might also insist that you cover the cost of their solicitor too, since they will need to register your plot of land with the land registry. This should only be a minimum fee, but it’s worth keeping in mind.
Commercial mortgages
Commercial mortgages are often used as the exit strategy for a development loan, providing property developers with the means to repay more expensive development finance. Once the development is complete, you can exit the property development loan and move this to longer term finance. Rates will vary, but will ultimately be based on the final valuation of the building(s), after the development work is complete.
Buy to let mortgages
If the end-goal of your property development project is to rent it to tenants – either residential or commercial, you will need a buy-to let mortgage. These types of mortgages are usually reserved for full-time landlords with property portfolios as opposed to individuals acquiring a second home to profit from as a rental property.
Lenders will require borrowers to provide evidence to show that their rental income covers the mortgage repayments as well as property maintenance/management and taxes.
Recent changes to legislation will soon see buy-to-let mortgages become more difficult to secure, so make sure to seek advice from a trusted property lawyer if this is the route you are planning to choose.
Auction finance
Auction finance can be a great way for property developers to secure high-quality land or buildings at below-market rates. If you make the winning bid, you’ll usually have to pay a non-refundable deposit on the day, and you’ll have 28 days to pay the balance. Specialist lenders can work with you ahead of this to understand your criteria and provide auction finance that suits your individual needs.
Purchasing land or property at auction can be a game-changer for both experienced developers and first-timers. However, since properties are sold on tight schedules, little time is allowed in this process for due diligence to be carried out. This does expose the buyer to considerable risk, so it’s worth ensuring you have a legal partner on hand to help should you pursue this option.
Bridging finance
Bridging finance is the most common type of property development finance, and it’s not hard to see why. Depending on the lender, you can expect to borrow up to 75% of the costs of a property project with a bridging loan.
This can be used to build new residential houses, renovate existing buildings or to convert or build offices, shops or warehouses. Unlike land mortgages, bridging finance is available to builders and first-time developers as opposed to solely those with proven experience. That said, a well-seasoned property developer with a string of successful projects under their belt will naturally secure the best rates.
The key benefits of bridging finance
The most extensive borrowing vehicle on the UK lenders market, bridging finance enables property developers to access considerable funds for their project. In the outset, funds will be provided to help kickstart the project. As the building works get underway and the project edges completion, more funds will be made available to the developer to ensure it can reach its goals.
How much can I borrow with a bridging loan?
The maximum amount given via bridging finance will typically fall between 50-60% of the purchase price of the site itself, or up to 60% of the Gross Development Value (GDV) i.e. how much the property will be worth once finished. For large-scale projects, loans of up to £25million may be available A positive decision on planning application can make all the difference to the funds you are able to secure through bridging finance.
100% Development Finance
Experienced developers with a proven track record of delivering successful property projects may be able to borrow up to 100% of the cost of a property development. This provides you with the freedom to proceed with a new project even if your capital is still tied up in past projects. Due to the high risk involved for the lender, 100% development finance is unlikely to be attainable for property developers with less extensive portfolios.
However, some lenders may still be open to working with you on this basis if you take on the development as a joint venture with a trusted builder – this does however mean that you and the builder would become equal partners in the project.
Choosing the right finance for property development
As you can see, there are a number of funding vehicles available. However, not all of these options will be suitable for your project. The type of development finance you choose will be largely determined by the scope of the work you are planning to undertake. This will usually be one of the following:
Light redevelopment/refurbishment
For minor redevelopment works that do not involve major structural changes, funding tends to be short-term to suit a quick turnaround of refurbishment, using either auction or bridging finance.
Extensive property renovation
If the work you intend to carry out goes beyond aesthetic changes to more structural development (i.e. extensions), funding options will typically be longer term bridging finance or short-term commercial mortgage finance.
Ground-up development
For major building works that require architects and a team of tradespeople, finance will need to be taken over many months or years to cover the time starting from purchase of land through to completion of the project.
How do I apply for development finance?
In the first instance, we recommend seeking advice from a specialist to scope out the project and determine the best option for finance. Ahead of applying for development finance, it’s essential to prepare your case, as lenders will require an in-depth understanding of your plans before they commit to financing your project. This will include:
- Details about your development experience, your company and proven returns.
- Architectural and development plans with timeframes and construction schedules
- A complete breakdown of the estimated project costs
- Estimated Gross Development Value (GDV)
- Details of assets and liabilities from your company, including a list of directors
- Several years business accounts and tax returns
- Your Exit Strategy details (i.e. selling the property, renting the building to commercial tenants, acquiring a commercial mortgage)
Our dedicated property lawyers can help you prepare this information ahead of engaging with potential lenders and advise on the best way forward.
How much can I borrow?
The amount a lender will offer depends on several factors, notably:
- Your credit history
- How much security you have
- Your history in property development (i.e. your track record of delivering successful projects)
- How long you need the finance for
If you are borrowing under your company, lenders will typically ask for a debenture giving a fixed and floating charge over company assets as well as a personal guarantee from any director with 25% or more in shareholdings.
It’s also worth keeping in mind that certain projects will not meet a lender’s criteria since they are deemed as too high risk. Always check that your project can be financed before committing yourself to it.
Legal advice for property developers
Any property development project demands a robust finance plan that can keep construction moving from one stage to the next. Not only does that mean acquiring funds to navigate the planning process, but also securing sufficient funds to kickstart and continue with development or refurbishment. Upon completion, you will want to switch to a product that is more short-term and cost effective, allowing you to potentially release equity for your next project.
Whatever your ambitions, our dedicated property law team are here to help you understand the key considerations of development finance and overcome any issues that should arise. Our approach helps property developers to secure funds faster, reduce risk and deliver development projects that generate healthy returns.
Get in touch with our team today on 0333 772 0926 or email is at enquiries@360businesslaw.com for a free consultation.