Development finance is a type of structured finance designed to help with the development of a residential or commercial property or building up a property from a straight plot of land.

The terms of the loan arrangement are structured in such a way to pay for (1) land costs and (2) construction costs and the funds are released to you in stages or tranches to manage cash flow more effectively. The loan term ranges from 6 – 24 months depending on the amount of construction work required.

For ambitious property developers or investors, the role of development finance is more flexible and catered to the needs of a ground up development or refurbishment project. 

Funds are often available in just a few weeks, compared to a traditional or mainstream financial product which could take several months.

How Much Can I Borrow Through Development Finance?

You can borrow several thousand or millions through development finance, of which the amount you can access is based on multiple factors.

Importantly, most development finance lenders are willing to up to 65% GDV, which is the gross development value and what the property will be worth upon completion.

This figure can be narrowed down to the land costs and the construction costs, with most lenders willing to offer 50%-70% of land costs and up to 100% of build costs.

What Can Development Finance Be Used For?

  • Flipping properties
  • Renovating properties to rent them out to tenants
  • Ground up new builds
  • Conversions and renovations
  • Residential properties
  • Commercial properties
  • Multi-use properties and HMOs

Development finance can be used to renovate a new or existing build, or develop a plot of land from the ground up.

What Are The Interest Rates and Fees For Development Finance?

Interest rates for development finance are around 4%-15% APR depending on various factors such as whether it is regulated or unregulated activity, the deposit amount, the level of risk and duration of the loan.

Other rates and fees to be aware of include:

  • Arrangement fee (1%-2% of loan amount)
  • Broker fee (1%-2% of loan amount)
  • Solicitor and legal fees
  • Architect fees
  • Stamp duty fees
  • Property valuation and surveyor fees
  • Exit fees 

How Do Repayments Work For Development Finance?

Typically, the interest for a development finance loan is rolled up and paid upon the completion and exit of the project. 

This might be at the point where the developer has sold the property for a higher price or refinanced with a longer-term loan, such as a commercial mortgage or buy-to-let mortgage because they wish to rent it out to tenants.

What Information Do I Need For a Development Finance Loan Application?

  • Business plans with cost analysis and project costs
  • Details of planning permission grants and restrictions
  • Schedule of building work and proposed timelines
  • Details from architects and builders
  • Clear exit strategy and timelines
  • 3 months bank account statements
  • Proof of identification 
  • Projected gross development value (GDV)

How Is Development Finance Different To Bridging Finance?

The clear distinction between development finance and bridging finance is that development finance is specifically structured to build up, renovate or construct properties, developments or plots of land. The terms of the agreement including the way that funds are released in stages and covering build costs, is designed to help developers with cashflow and fund their development project.

By comparison, bridging finance is used to complete on property transactions in a tight deadline, helping you to avoid property chains and not factoring in building work per se. There are hybrids of bridging and development finance and we would be delighted to discuss these options with you.

KP Finance is here to help you with any queries you have relating to development finance. For more information, please contact Samuel at enquiries@kpfinance.co.uk or call today on 0203 488 1128