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Property development finance

nigel woollsey

Nigel Woollsey

Online Writer

What is property development finance?

Property development finance includes property development loans, bridging loans and commercial mortgages.

Property development loans

A property development loan can be used to purchase land, build new developments and renovate existing ones. Terms of up to three years are available (our broker offers terms up to 18 months) and they are suitable for large developments as they offer high loan-to-values. Payments are usually released in stages, in line with the progression of the development. Once the development is complete, you can exit the property development loan and move this to longer term finance or sell the development.

To have the best chances of being accepted for a property development loan you should have:

  • A proven record of successful developments in the past
  • Agreed ‘off-plan’ buyer(s) or;
    • Can show that the development will service a strong rental demand where the building is speculative
    • Already own the land and have planning permission

You can find pre-planning development loans, although these will have higher rates of interest and you may need to be a more experienced developer.

 

Bridging loans

Bridging loans are short-term finance of usually between 12 to 24 months for property purchases that need to be made quickly, such as at auction, to fund renovations or to allow time for tenancy negotiations to be completed.

Once completed, you can exit the bridging loan to an alternative longer-term property loan or by selling the property.

Commercial mortgages

Commercial mortgages are used to purchase commercial properties and are a longer-term lending product. 

What is the difference between a bridging and a property development loan?

These finance products have two key areas of difference: their duration, and criteria.It is a point of debate if property development loans are lower cost than bridging loans. While Moneyfacts collects data on the monthly rates for bridging loans, there is not an equivalent source for longer-term property development loans.

Loan durations

A bridging loan is a shorter-term loan of on average 12 months, (although longer terms are commonly available), compared to a property development loan, which can be up to three years.

Lending criteria

Both property development finance and bridging loans have more flexible criteria than other commercial finance options. Your income is less relevant in both cases as lenders will assess the viability of the loan on the security available and your proposed exit strategy (how you will repay the loan).

For higher risk projects, property development loans will also use your experience as a developer as part of their lending decision. You will need to outline your expected profits from your development for a property development loan, compared to a bridging loan, where the focus is on the security available.

Interest rates and costs

Interest rates are usually lower for property development loans compared to bridging loans. Both products share a similar pricing structure, charging interest monthly, arrangement fees and valuation fees.

The interest rate for both types of loans will depend on the loan-to-value you need, the size of loan, the type of development and your experience and forecasts. Interest is charged on a monthly basis.

What is the difference between a property development loan and a commercial mortgage?

The main differences between these products is the length of term of the loan, the speed to get a loan and the rates of interest and costs.

Length of term

Property development loans are a type of short-term lending with a term of up to three years, while commercial mortgages offer terms of 25 years or more in some cases.

Speed to get a loan

Property development loans are usually quicker to process and obtain than a commercial mortgage.

Interest costs and fees

Property development finance tends to have higher set-up fees and interest rates than commercial mortgages. Money can be released in stages and repayments can be deferred until such a time as you sell the property, or secure a commercial mortgage, based on the final valuation, after work has been completed.

Moneyfacts tip

Moneyfacts tip Michelle Monck

Look into planning permission as early as possible. Obtaining this from the local council can take a good deal longer than you might anticipate, while potential financiers will be encouraged if this is in motion, or already in place, by the time you approach them with details of your development plan.

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