How Does Development Finance for Property Investors Work?

Property investors looking to build new developments from scratch or renovate existing properties have no shortage of funding options to explore. One of which is specialist development finance - a bespoke solution created specifically for these types of purposes.

But how exactly does development finance work, and who is it suitable for?

Development Finance: The Basics

A development finance loan can be taken out to cover the costs of almost any type of property construction, conversion or development project. It is particularly suitable for more complex and advanced projects, typically available with a minimum loan value of £500,000 (variable by lender).

Issued as a strictly short-term facility, development finance is designed to be repaid within 6 to 18 months of the issue date. Interest is charged on a monthly basis, making development finance a cost-effective facility when repaid promptly.

There are no limitations to how much can be borrowed, and it is possible for a specialist development finance loan to be arranged to cover 100% of the project’s costs. A primary (senior) development finance loan may be issued up to a maximum LTV of around 80%, and the rest can be covered with a second-charge loan - aka mezzanine finance.

The biggest difference between development finance and conventional secured loans is the way the funds are released. With development finance, the lender instructs a quantity surveyor to inspect the works that have been done by the developer at various stages throughout the project. The funds are released to the developer and a series of stages, after the completion of major project phases.

Only when the lender is satisfied that the project is progressing as planned will the next instalments be released.

Who Is Development Finance Suitable For?

Most development finance specialists are somewhat restrictive with their lending criteria. Development finance is usually available only to those with an established track record in the property development profession.

In order to qualify, you will need to provide your lender with evidence of successfully completed projects, similar to the initiative you are looking to fund with a development finance loan.

In addition, eligibility for development finance is assessed largely on the basis of the applicant’s exit strategy. Lenders expect to see extensive evidence of the applicant’s capacity to repay the loan in full and on time, with clear details of how they will raise the funds.

For example, the sale of the development upon its completion, or transitioning the loan to a longer-term facility, such as a buy-to-let mortgage.

Do I Need a Broker?

Broker support is considered essential for anyone interested in applying for development finance. Many of the UK’s highest-rated development finance specialists offer their services exclusively by way of broker introductions.