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What are Property development Loans?

Property Development Loans are also known as property development finance both are loans that are taken out for the development of property either residential, commercial or a mix of both residential and commercial. The loans are mostly provided by specialist lenders or mainstream banks such as high street lenders, over the last ten years over 80 specialist lenders have entered to market as high street banks usually only offer loans to existing customers or very experienced developers and even then they will usually only offer loans on one development in order to reduce their exposure, this allowed the specialist lenders to enter the market where developers could not get the funding they required in order to develop. Mainstream lenders would also not even consider a Property Development Loan without a substantial track record of previous projects that had been built out and sold. So the specialist lenders gradually started to offer loans that would fill this void in funding and allow even borrowers with no track record and or insufficient funds to get their projects started.


What are the interest rates for property development loans?


With so many lenders in the market, Interest rates can vary enormously, although mainstream lenders are notoriously difficult to get loans from they offer the best interest rates with rates from as little as 4% p.a however they will also charge hefty Commitment fees of as much as 1.% of the loan amount and will also add up to 2% of the gross development value (the amount the properties sell for) some will even charge a plot release fee as each property is sold, furthermore they will want 100% of the sale proceeds from each and every plot sold until they have been paid in full, this means you will only start to receive your profits from the last units to sell.


Specialist, lenders tend to be more expensive with rates starting from 6% pa, however when making any comparison you have to take into account all costs and also the ease at which you will be able to deal with the lenders and how much flexibility they can offer, because specialist lenders are dealing with either their own funds or using investors capital, they don’t have to tick so many boxes when looking at a project, they will want an arrangement fee of up to 2% of the loan value but generally there are no exit fees, also many lenders will also allow you to keep a portion of the cash received from sales this can have a massive impact for smaller developers who want to see profits coming through as sales are achieved. When taking out development loans all of these factors need to be taken into account, for instance, the ability to take profits as each property is sold could allow you to get onto your next project quicker and so increase profits by allowing to start more development.


Development Loan Types of property.


Development loans are available for residential and commercial, although most lenders prefer to lend on residential developments with houses being their first choice, then flats in areas where flats are well established and consider a normal purchase say city centers with a good stock of flats that sell reasonably easily and or affluent residential areas where there have previously been high-end conversions or flat schemes that have sold well in the past. Commercial and or any residential scheme that contains any commercial element however small will always be the hardest development to get funding for and if a lender is interested then the interest rates on offer will be higher in order to take into account the increased risk if the properties are hard to sell. Generally speaking a good housing scheme with 1-5 units  in a good family location would attract the best interest rates, because lenders know even in poor market conditions their will always be buyers for this type of development.


What experience do I need to get a property development loan?


Had you been looking for a development loan 10 years ago then without experience it would have been near impossible to get any type of finance for property development, the high street banks just didn’t want to know unless you had completed at least one development and sold all of the properties funding was just not available, obviously this was a serious challenge to anyone who wanted to start out in property development, meaning the only way to start was to fund the project through your own funds. The high street banks instead focused on lending to existing customers and or only developers with a proven track record over many years. This all changed when specialist lenders entered the market, they would look at first-time developers and rather than looking for track record looked at the merits of the development that was proposed and also the ability of the lender to complete the development and sell at a profit. They are more interested in how the borrower will develop the site, will they be using an established builder under a fixed price JCT contract to cap cost overruns, are they looking at the development as a business transaction rather than just the thrill of being a property developer with its many pitfalls, as such providing an experienced developer can demonstrate a good business acumen then they would offer to fund the development.


Experienced developers also turned to specialist and bridging lenders to fund additional schemes that their banks would not look at funding, this is usually because they have a site funded with them already and their bank would not want to take on any further exposure until that project was completed and sold, this allowed experienced developers to carry out more development and so increase profits, although the cost are slightly more the ease of doing business and the fact that they can build more properties more than offset the small increase in interest rates they had to pay.


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