Q: What is development finance, and what makes it a niche area of the mortgage market?
A: Development finance is a specialised area within the mortgage market that deals with funding for various types of development projects. It is considered niche because each project is unique, and the level of financing can vary significantly, ranging from tens of thousands to multi-million-pound deals. The financing is typically used for large-scale residential or semi-commercial projects like ground-up builds, commercial to residential conversions, extensions, and smaller-scale heavy refurbishment projects.
Q: How has the recent economic climate affected the development finance sector?
A: The recent economic climate, characterised by rising interest rates and high inflation, has impacted the development finance sector. These factors have led to increased costs for labour and materials required to complete development projects. As a result, property developers are experiencing a squeeze on their profit margins. Despite these challenges, there is still a high demand for development financing.
Q: How has the lending environment changed in the current economic climate?
A: In the current economic climate, the lending environment has become more stringent, with tighter lending criteria and more rigorous underwriting practices. As a consequence, obtaining financing for development projects has become more challenging. However, with the right knowledge and expertise, it is still possible to secure funding.
Q: What role does financial advice play in the development finance process?
A: Financial advice plays a crucial role in the development finance process. Due to the complex nature of this niche area, having proper financial guidance is essential for securing the best deals and navigating the intricacies of the development finance sector.
Q: What types of projects do lenders typically finance with development finance?
A: Lenders typically finance large-scale residential or semi-commercial projects, such as ground-up builds, commercial to residential conversions, extensions, and smaller-scale heavy refurbishment projects. The financing can range from larger deals worth £2 million and above to smaller developments valued between £250,000 and £500,000.
Q: What factors are important when applying for development finance?
A: When applying for development finance, preparation and planning are critical. It is essential to have all required certifications and insurances in place before submitting the funding application to avoid delays. A detailed schedule of works with itemised costs and timescales, as well as a Joint Contracts Tribunal (JCT) contract, is crucial for showcasing the project’s progress to the lender.
Q: Why is it recommended for inexperienced developers to employ contractors and professionals with project management experience?
A: Inexperienced developers are advised to hire contractors, builders, and architects with previous project management experience. This helps to reassure lenders that the project will be efficiently managed, deadlines will be met, and the work will be carried out by skilled and experienced workers.
Q: What factors should be considered in determining the loan amount for development finance?
A: To determine the loan amount for development finance, several factors need to be considered. These include the current value of the land or project, the estimated build costs, and the projected end value of the completed development. Having a clear exit route is also essential for lenders.
Q: How does having equity in the project impact the application process for development finance?
A: Having equity in the project, such as owning the land outright, can streamline the application process for development finance. Developers with equity can typically receive funds on day one of drawdown at a higher Loan-to-Value (LTV) ratio, usually between 55-65%, which makes the deal progress more smoothly.
Q: What role can specialist brokers like Clever Lending play in securing development finance?
A: Specialist brokers like Clever Lending can be invaluable in securing development finance. They have expertise in this niche area of the mortgage market, and they can help clients navigate the complexities of the development finance sector, ensuring they get the necessary support for their property development projects.