Development Loans

Key Takeaways

• Development loans can be arranged to finance building developments
• Development experience isn't necessary
• Funds are released on a stage-by-stage basis following a series of valuations to ensure the build is on track
• Development loans can be used for residential developments and commercial, including refurbs

What is a Development loan?

A Development loan, also known as a Property Development Loan, is a short-term financing solution for funding building developments. It can be used to support the purchase and build costs involved with developments of residential, or commercial development projects.

The funds are released on a stage-by-stage basis and as the build progresses, more funds can be drawn down. 

What can Development loans be used for?

A Property development loan is business funding for residential, commercial, or mixed-use property projects. It can include term loans, mortgages, bridging loans, and personal loans. It's used for large-scale building or renovation projects like housing, workspaces, or regeneration. Ideal for ground-up developments.

• Building for your own commercial property, including building on Land.
• Building a property to sell.
• Building a property to hold and let.

When arranging Development loans, pre-let agreements will form an important factor in whether this funding is agreed upon, or not. A pre-let agreement is an arrangement with a tenant in advance to let the property immediately after development has finished.

Private property development finance provides funding for investing in private residential properties when immediate funds are not available. It is open to individuals, developers, property companies, and building firms. Eligibility criteria may vary, including a business plan or credit score assessment. A well-prepared investment strategy can improve your chances of securing a favorable rate.

What can be built with a Development loan?

The development loans can be secured against, but are not limited to, the construction of:

• Industrial buildings
• Land with planning permission for commercial property
• Construction of office blocks
• Refurbs of shops or conversions
• Farmland builds
• Pub-to-residential conversions
• Office-to-residential conversions.

Who can apply for a Development loan?

Loans are available to first-time developers as well as experienced ones.

There are various types of property loans available, therefore it's important to ensure that you are applying for the most suitable type of finance to meet your requirements. If you are inexperienced, it’s a good idea to find out more information on how development loans can work for you from a Mortgage Adviser.

How much funding is available with a Development loan?

Finance can start from £50,000, over a maximum term of 36 months. However, each lender will set a policy on how to calculate the loan amounts available.

To make a decision on how much funding is required to complete the project, and what loan amount would be available, the Lender will assess the current value of the land, and its forecasted value, once development has been completed.

To obtain this information, the lender will require a professional survey, and the report will cover three valuations:

• The current value - The current valuation of the site before any work has begun
• The Gross Development Value - The estimated valuation of the site after the work has been completed.
• The Build Costs - The estimated build costs required to complete the development

How will the funds be released with a Development loan?

Development loan funding can be split into two parts.

Funds to purchase the site.

Funds to purchase the land can be released upon completion of the purchase.

Funds to finance the build costs.

The release of funds to finance build costs is done in stages based on the progress of the development.

How is the Development loan progress assessed?

Once the plan is drawn up and work has begun, the plans will be handed over to an Independent Monitoring Surveyor (IMS).

An Independent Monitoring Surveyor will continuously monitor the value of the site and build progress. They will provide updates for the lender. Any issues will be flagged. Based on the progress of the site being in line with the plan, the lender will be able to make stage-by-stage payments as agreed in the plan.

It is important for the lender that the value of the site is increasing in line with the funding amounts. 

The costs of an Independent Monitoring Surveyor will be paid by the borrower, although the IMS works for the lender.

Ways to repay a Development Loan

Repay the Loan 

At the end of the agreed term, using the funds from the sale of the development.

Re-Finance to a longer-term

Refinance the loan to a longer-term which will allow you to Let individual properties, providing that the rental income can cover the loan repayments.

Use a bridging loan

Use a bridging loan to fund a Development Exit, and use the funds to repay the loan so you do not need to wait for the sale of the properties, and can begin financing your next project.

Getting advice on Development Loans

If you're unsure how to get started with seeking advice on development loans, complete the Sunny Fact Find. The answers you provide help us to find the best-suited adviser for your needs. Your adviser then contacts you for a no-obligation chat on how they can help. You decide how to proceed.