Development finance is a type of loan which is used by developers specifically to build, construct and increase the value of a property or plot of land. 

The loan is structured in a certain way to assist with the building work and development process, taking into account the costs and cash flow. 

Specifically, a development finance loan will cover up to 70% of land/property costs and up to 100% of building costs. 

Understanding the process can help your application progress as quickly as possible and ensure that you know all the different stages involved.

Stage 1 – Start With An Enquiry

Start by getting in touch with a development finance company and explain the property or land you are looking to purchase and your plans for it. Having initial information such as planning permission, costs, budget estimates and loan requirements can certainly help moving things along. 

Many lenders offer free consultations or use models to give you an indication of costs and budget. You may be able to determine what GDV you can borrow at and what percentage of land and building costs can be covered by your loan.

The team at KP Finance will be delighted to discuss your requirements, simply email us today at enquiries@kpfinance.co.uk or speak to Samuel Kalms on 0203 488 1128.

Stage 2 – Make An Application and Agreement in Principle (AIP)

To proceed, you can make a formal application which is typically completed online. At this stage, you will need to provide project information, plans, budgets, personal identification and financial statements.

If you pass the initial stage, the lender can grant you an Agreement in Principle (AIP) which gives you an initial quote, loan amount and repayment figure. This quote is based on what the lender can offer you if all your information and plans stack up. You will need to undergo further assessment, underwriting and due diligence. 

Stage 3 – Due Diligence and Valuation

The lender will carry out due diligence of your project and depending on its level of complexity, this could involve:

  • A site visit
  • A formal valuation by a RICS surveyor
  • Financial checks
  • Proof of planning permission
  • Proof of costs from contractors (known as a development appraisal)
  • Financial viability

Stage 4 – Receive a Loan Offer and Legal Documentation

If the lender approves your loan, you can be presented with an official loan offer which confirms the loan amount, interest rates, duration and repayment schedule. 

You will need to liaise with your solicitor to confirm the terms and allow you to progress with the purchase of the property (if you do not own it). 

The solicitor will double check all other outstanding issues which may be involved with the property purchase including road restrictions, clauses, leases, utilities, subsidence and more.

Stage 5 – Loan Completion and Drawdowns

Once confirmed by the lender and your solicitor, your loan completion becomes finalised and the first tranche of funds can be transferred to you, and this usually covers the land purchase and sometimes, some initial building costs.

Importantly, development finance is released in tranches or instalments at different milestones of the project. This helps the developer to budget accordingly and also protects the lender in case any milestones are not reached.

Stage 6 – Repayment and Exit

Your loan interest is typically rolled up until the end of the loan term and repaid in full upon exit. The exit for a development finance loan could be selling the property for a higher price (flipping it), refinancing under new terms or getting a new loan such as a commercial mortgage or buy-to-let mortgage so that you can rent the property out to tenants. 

Any delays in repayment could incur late fees and penalties and communicating any delays with your lender as soon as possible is wise to reduce any potential costs. It is very common to have delays with construction work, if you hit snags or issues with contractors.

You also have the option to repay your loan or exit early, however, depending on the lender you may be subject to early redemption fees of 1%-2% of the overall loan value.

For any questions relating to development finance or to make an enquiry, please contact our team at enquiries@kpfinance.co.uk or speak to us on 0203 488 1128. 

See also: what is development finance?