By Matthew Dilks, Bridging and Commercial Specialist, Clever Lending
Development finance is an extremely niche and specialist area of the mortgage market. No two projects are the same and the level of financing involved often varies from tens of thousands to multi-million-pound deals depending on the type of project being undertaken.
Typically, development finance is often used for large scale residential or semi-commercial projects such as ground-up builds, but can also be used for commercial to residential conversions, extensions and for smaller-scale heavy refurbishment projects.
Most recently, rising interest rates and high inflation have had an impact on the sector, forcing substantial increases to the cost of labour and materials required to complete these projects, resulting in a squeeze on margins for many property developers. Yet despite this pressure, demand for development financing still remains high.
Admittedly, placing business in the current economic climate has been challenging due to tighter lending criteria and more scrupulous underwriting practices, but it is definitely not impossible. As with all aspects of the mortgage market, knowledge of this niche area is essential to getting the deal done which is where the importance of financial advice comes into its own.
Securing Funding for Property Development: How Clever Lending Can Help You Succeed
At Clever Lending, we consistently receive, and successfully place, enquiries ranging from larger £2 million plus deals to small-scale property developments worth between £250,000 and £500,000, with many of these clients seeking funding for heavy refurbishments, change of use or extensions to existing properties.
Knowing where to place the business and understanding what each lender is willing to offer is crucial to securing funding. For example, not all lenders will finance small scale developments worth less than £750,000, which is why using a specialist broker familiar with this area is important.
Preparation and planning also play a crucial role in property development cases and it is essential that all required certifications and insurances are signed off and in place before an application for funding is submitted, as this will help to streamline the process and prevent the application from stalling.
Having a detailed and itemised schedule of works that clearly lists the costs and timescales associated with each stage of any planned development, as well as a Joint Contracts Tribunal (JCT) contract, is also important as it enables the lender to see how the project is expected to progress towards completion.
Generally, it is always recommended that inexperienced developers employ contractors, builders and architects with previous project management experience as this helps to reassure lenders that deadlines can be met and that the project is being managed by skilled and experienced workers.
As with all types of short-term funding, having an exit route is vital and the value of the land and/or project in its current state; build costs and the estimated end value of the completed project need to be determined before a loan amount can be agreed. It is also recommended that all applications be submitted with full planning permission where possible, as this can help to ensure the funds are released quickly.
Generally, the application process is often more efficient for those clients who have equity to put into the project, such as those that can buy a property outright but need to borrow funds for the actual development. This is an important consideration for smaller developments as the funds released on day one of drawdown typically amount to between 55-65% LTV, so those developers that already own land are likely to find the deal progresses with greater ease.
Getting the right property development finance in place is essential to the success of any development project. Lenders will always require a detailed plan of the proposed project as well as proof that it can be completed before any agreement can take place.
Brokers unfamiliar with this niche area of the mortgage market can refer their client to a specialist broker with expertise in the area, such as Clever Lending as we can help you navigate the intricacies of the development finance sector and ensure your client gets the support they need when embarking on a property development project.