Property development finance – frequently asked questions

We take a look at the most common questions asked about property development finance. These questions include lending criteria and the cost of borrowing.

How long will a development finance application take?

There is no set time period as it will depend on a number of factors. These include:

• How quickly you can return the required documents
• How quickly a surveyor can complete a valuation
• The complexity of the development project
• Whether the lender has any additional questions

At Esper Wealth we aim to complete the process within six weeks. Our preferred lending partner can help if time is an important consideration.

Generally speaking, the industry standard is on average a lot longer. Underwriting typically takes 3-4 months and then another 4 weeks for the drawdown of funds.

What is the average interest rate on property development finance?

Interest rates vary significantly depending on the project. Smaller loans will carry higher interest rates than larger applications since there isn’t an economy of scale available.

Typical interest rates for the larger most viable projects start at 4.5%. However, a good benchmark would be 7%. Please bear in mind that as funds are not given to you all at one time, you only pay for what your current borrowing is. This has the effect of bringing down the real interest rate.

Are there any other charges on property development finance?

Yes, there are additional charges. These include the following:

• Lender arrangement fee. This is usually 1-2% of the loan amount.
• Lender exit fee. This fee is not charged by all lenders. If it is, the rate is 1-2% of the loan amount.
• Broker fees. Most brokers expect to earn 1% for arranging a property development loan.
• Surveyor fees. These can vary a lot. They depend on the requirements of the lender.

When do I repay my property development loan?

The loan is usually paid back upon completion of the project. Most developers convert the loan into other finance arrangements at this stage as it is cheap to do so.

It is important to note that the interest is rolled into the loan. The total capital plus interest is repaid when the development is completed.

Can I apply for development finance for any property build?

For most types you can. Esper Wealth works closely with lenders in a range of areas. These include:

• Environmentally friendly builds
• New builds
• Mixed use properties
• Refurbishment projects
• Residential and commercial conversions

Can I borrow money as a new property developer?

Yes. Each project is analysed on merit. As a new developer, your application will be considered to be of a higher risk, as you don’t have a track record. This is why it is important to get specialist advice. You can speak with us today to evaluate your options.

Can I get development finance without planning permission?

In short yes. However, it is easier and cheaper with planning permission granted.

Another important consideration is that planning permission increases the value of the plot. With this in mind, you are likely to be able to borrow more with planning permission in place. More importantly, you can start developing straight away, so you pay fewer loan fees.

When should I apply for property development finance?

This depends on a number of factors, which are listed below:

• Do you already own the land? Or do you need the financing to fund the initial purchase?
• How soon do you expect to start work?
• How far along you are in the development forecast? Do you have detailed plans and budgets ready to include on your application?

It is difficult to give an appropriate time, because if you need finance to facilitate the purchase, you may not have planning permission, or detailed plans in place yet.

We recommend getting started with the application as soon as you can. This is because the selected lender will take time to evaluate your proposal before approval.

What costs should I include on an application?

The more the better. Any lender will want to see that you’ve included all of the overheads associated with financing a UK property development. They will also want to see a reserve for any unexpected problems.

We recommend including:

• Materials, labour and contractors carrying out the building work.
• Professional fees including solicitors, architects and project managers.
• Lending fees from your lender. This should include arrangement and exit fees as well as interest payments.

Whilst you might not know the exact cost for every element of your project, it’s important to include provisions and estimates to ensure the development finance value covers the full cost of the project.

Should I Include a contingency figure in my budget?

Yes, yes and yes! Contingencies are expected. There are going to be some unexpected delays and escalating costs. Inflation, for example, is a major concern for developers in the current market.

It is prudent to build in a 20% contingency fee across your whole budget. Lenders understand risk and insist that a contingency fee is incorporated into the budget.

How do building regulations affect my application?

Build regulations mean that every new development or construction must be built to national standards to ensure they are safe for the people living in them.

Most buildings are covered, and you can apply for Building Regulations Approval via the relevant local council. This means you will receive visits from an inspector at key stages of the build.

There are some contractors which will manage the building regulations process for you. They will provide certifications that everything is compliant with existing regulations.

If the builder isn’t managing building regulations inspections, then you will be liable as the property owner. If things go wrong you could be served with an enforcement notice to correct any aspects of the build that don’t comply with health and safety standards.

How Can I secure the best deal on development finance?

Our partner is a specialist lender who can secure you the best rate. By fully evaluating your project they can advise you on how to get the best deal for you. There are no upfront costs and you will only pay a broker’s fee if you select finance through them. Contact your property consultant to arrange a free no obligation meeting.

What if I have bad credit?

Any circumstances outside the standard lending criteria mean you will need to consult with a specialist who understands the underwriting requirements of each lender.

Bad credit increases the perceived risk to the lender. However, there are several lenders who will evaluate any project on its merits. In short, bad credit history means you will pay a higher rate unless you can provide extra security.

What are the benefits of offering a larger deposit?several lenders will

Development finance is very similar to other lending. If you are seen as a lower risk you can get a cheaper rate. The bigger deposit you give means a lower loan to value rate. This means less risk to the lender, which means a lower interest rate for you.

However, deposits aren’t the only consideration. It might be more cost-effective to offer a lower deposit if that means you have a higher contingency fund.

What about bridging finance?

There are some alternatives to development finance. Bridging loans are the most common. This is a short-term loan, where the borrowing is in a lump sum, as opposed to stage payments. Bridging finance is more expensive compared to development finance. Sometimes developers use this finance option if they don’t have planning permission.

Esper Wealth

You can find out more about development finance by clicking here. We work with developers to find funding solutions for their projects. Contact us today to see how we can help you to fund your next project.