Planning a new property development can be an incredibly exciting and enjoyable task. As enticing as the prospect of a new development may be however, there are many things to consider if you want to get it right. Chief among them is the question of how to finance your property development. When it comes to property finance, the choices can often feel overwhelming and confusing, however. From buying the property to funding the development, there are many different financial products to choose from. Deciding which one is right for you can be a difficult and time-consuming process. But it doesn’t have to be. By reading this guide, you’ll find the world of property finance a much simpler place and position yourself to finance your property in the way that is right for you.
Buying the development property
Before you can even think about how to fund the refurbishment of a property, you need to buy a property first. While some developers will be cash buyers, most will leverage some form of financing to help them fund the cost of purchase. The following are the most common types of property finance used to fund a purchase.
Private or commercial mortgages
Mortgages are a relatively well understood financial product. In return for a minimum deposit of five percent of the purchase price, banks and other high street lenders will loan the remaining balance. Interest payments (and usually capital repayments) are made monthly with the bank taking ownership of the property if the borrower defaults. Commercial mortgages are available exclusively for commercial property such as shops and offices.
A bridging loan is a short-term loan used by private buyers and developers to “bridge the gap” until long-term financing is secured. These loans will typically last between six to 18 months with the balance plus interest being repaid when a property is sold or a mortgage is secured.
The auction room is a fantastic place to find properties at discount prices. But you’ll need to make payment in full within a month of you placing the winning bid. That means moving fast if you don’t have the cash at hand. Luckily, many lenders specialise in auction finance and allow you to access the cash you need fast. Many auction goers will even be able to establish an agreement in principle with these lenders so that they can attend the auction knowing exactly what they can afford.
Funding the development
Mortgages are great when it comes to buying a property, but they can’t be used to fund the development or refurbishment of an existing property. As a result, development loans are somewhat limited. Property developers usually have two choices.
A Bridging Loan
A bridging loan isn’t just a great way to fund a property purchase, one can also be used to fund small-scale refurbishments. If a developer plans to sell the property quickly once development has been completed, a bridging loan can be used to front the capital required to complete work. The loan can then be repaid with interest once the work has been completed and the property has been sold. These loans are still short-term, which is fine why a bridging loan is only normally used for light refurbishments.
For larger scale developments such as new builds and heavy refurbs, property developers will typically turn to development finance, which is available direct from lenders or via brokers like Top 10 Finance – development finance specialists. These loans are usually for significant sums of money—think millions of pounds—and will cover the cost of purchasing the land and the cost of development. While they do require an upfront deposit from the developer (which usually funds the majority of the land purchase), a development loan frees up a developers remaining cash for other projects or to cover unexpected expenses. As a result, developers can leverage these loans to significantly expand their portfolio without having large amounts of liquid cash.
As you can see, whether you need funding for the purchase of a development property or for the development itself, there is a range of property finance options available to you. Hopefully, this article has helped make it easier to choose the best type.