Property Development Finance: What Are Your Options?

by: SeanH
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If you are planning a development project and know you are going to need property development finance, you may be wondering what your options are. There are a number of options, depending on your status and the size of your project.
• Residential mortgage. If the site you are planning to develop is your main residence, or you are intending to live there once the project is complete, you may be able to get away with a standard residential mortgage. This is the cheapest option. However it’s unlikely that the lender will agree to lend you enough to finance the actual development as the loan will be based on the current value of the site or property. So if you are determined to stick with a residential mortgage, you may have to look at a personal loan to finance the development. Alternatively you may have another property you could remortgage.
• Bank financing. property development finance is usually available from banks at a reasonable rate. A large deposit will be required, especially if you are a newcomer – in this case the loan will almost certainly be restricted to 50/50 (50% of purchase price plus 50% of development costs). If you are more experienced, the banks may provide 70/70 finance.
• Specialist lenders. There are increasing numbers of specialist lenders of property development finance coming into the market. These lenders will often provide higher loan-to-value amounts – i.e. higher than the 50/50 or 70/70 respectively. However the rates on finance from these lenders will be anything from 1-2 per cent higher than from the banks.
• 100% lending with extra security. If you are in a position to provide additional security for your property development finance (i.e. other property) you may be able to get 100 per cent finance. Lenders will have to satisfy themselves that the other property is unencumbered – i.e. free of other loans or charges secured on it – and the onus is on you to decide whether you are willing and able to take this sort of risk. You need to be very sure of the viability of your project.
• Gross Development Lending (GDV). This means obtaining your property development finance on the basis of a forecast of the ultimate value of the project when the development is complete. Again, this way you could get 100% finance. Obviously the forecast needs to come from a professional valuer or surveyor.
• Mezzanine and equity finance. Experienced professionals can often find additional means of financing a project – for instance, attracting funds from investors willing to take a high risk for a high return. One way of doing this is by issuing preference shares. This is a possible way of financing a project without using your own money, but it is not for the novice.

When looking for your property development finance, you need to start by working out what funds are already at your disposal. Then talk to a broker or an independent financial adviser, who will help you decide which option is the best for you.

About the Author

Sean Horton is a Director of Enhanced Wealth Limited who offer a specialist service for property development finance

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