Property Development Finance
Specialist finance for property development projects
Property development can be an attractive investment opportunity, but funding a development is very different from arranging a standard residential mortgage.
Whether you're purchasing a property that requires substantial refurbishment, converting an existing building, constructing new homes or undertaking a larger development project, the right finance needs to match the project.
At Cambs Ely Mortgages, we help property developers and investors explore suitable development finance solutions, working with a wide range of lenders and specialist finance providers.
From your initial plans through to funding and exit strategy, we can help you understand the finance available and what lenders are likely to require.
What Is Property Development Finance?
Property development finance is specialist funding designed to help finance the purchase, construction, conversion or significant refurbishment of property.
Unlike a conventional mortgage, development finance is generally structured around the development project itself.
The lender will want to understand:
What you are buying
What you intend to do with the property
How much the project will cost
How long the development should take
What the completed property is expected to be worth
How much money you are contributing
Your development experience
How the finance will ultimately be repaid
The lender will also assess the viability of the project before deciding whether to provide funding.
What Can Development Finance Be Used For?
Development finance can potentially be used for a variety of projects, including:
New Build Developments
Funding the construction of new residential or commercial property from the initial purchase of the site through to completion.
Property Conversions
Converting an existing building into separate residential units, commercial premises or another permitted use.
Major Refurbishments
Funding substantial renovation projects where a standard residential or buy-to-let mortgage may not be appropriate.
Property Developments
Projects involving the purchase, redevelopment and eventual sale or refinance of property.
The suitability of a particular funding structure will depend on the project, planning, costs, experience and lender criteria.
How Does Property Development Finance Work?
Development finance is normally structured around the cost and projected value of the development.
A lender may consider several figures, including:
Purchase price – what you are paying for the site or existing property.
Build costs – the estimated cost of construction, conversion or refurbishment.
Professional costs – architects, surveyors, planning consultants and other professional fees.
Gross Development Value (GDV) – the estimated value of the completed development.
Loan-to-Cost (LTC) – the amount borrowed compared with the total development cost.
Loan-to-GDV (LTGDV) – the amount borrowed compared with the expected value of the completed development.
These figures help the lender determine how much they are prepared to lend and whether the project provides sufficient security.
What Is Gross Development Value?
Gross Development Value, commonly known as GDV, is an important figure in development finance.
It represents the expected value of the completed development once the project has been finished.
For example, imagine a developer purchases a property and converts it into four apartments.
If the completed apartments are expected to have a combined value of £1 million, the GDV would be £1 million.
The lender may use the GDV alongside the development costs, purchase price and other factors when assessing the maximum amount they are prepared to lend.
Importantly, the lender will normally want evidence supporting the projected value rather than simply relying on the developer's estimate.
Do I Need Development Experience?
Not necessarily, but experience can be an important consideration.
Some lenders are comfortable considering experienced developers with a proven track record, while others may consider newer developers where the project is particularly strong and appropriate professional support is in place.
For a first development, lenders may look closely at:
The complexity of the project
Planning permission
The development team
Contractor experience
Project costs
The developer's financial contribution
The property's location
The proposed exit strategy
A strong professional team can be particularly important where the developer has limited previous experience.
How Much Deposit or Equity Do I Need?
There is no universal deposit requirement for development finance.
The amount of funding available can depend on the purchase price, development costs, GDV, project type, developer experience and lender criteria.
You may need to contribute some of your own funds towards the project, although the structure can vary considerably between lenders.
Development finance can also involve additional costs such as arrangement fees, valuation fees, legal costs and other professional expenses.
This means it is important to assess the total cost of funding, rather than looking only at the headline interest rate.
What Is the Exit Strategy?
One of the most important parts of any development finance application is the exit strategy.
The lender needs to understand how the development finance will be repaid.
Common exit strategies include:
Sale
The completed property is sold and the proceeds are used to repay the development finance.
Refinance
The completed property is refinanced onto a residential mortgage, buy-to-let mortgage or commercial mortgage, depending on the finished property and intended use.
Development Exit Finance
A separate short-term facility may be used to repay the original development finance while the completed property is being sold or refinanced.
The proposed exit needs to be realistic and supported by the overall project.
Can Development Finance Be Used for Refurbishment?
Potentially, yes.
Some refurbishment projects may be suitable for development finance or specialist refurbishment finance, depending on the scale and nature of the works.
For example, a project involving structural changes, conversion, planning or substantial redevelopment may require specialist funding rather than a conventional mortgage.
For smaller refurbishment projects, other forms of property finance may be more appropriate.
This is why the project should be assessed on its individual circumstances.
What Will the Lender Need?
Development finance applications can require significantly more information than a standard mortgage.
Depending on the project, you may need to provide:
Planning permission
Architectural drawings
Building plans
Development appraisal
Detailed build-cost schedule
Contractor information
Professional team details
Purchase information
Property valuation
GDV assessment
Development programme
Details of your previous experience
Proof of available funds
Personal and/or business financial information
Proposed exit strategy
The more complicated the project, the more detailed the lender's assessment is likely to be.
Why Use a Specialist Development Finance Broker?
Development finance is a specialist area of property funding, and lenders can have very different criteria.
One lender may be comfortable with a particular development type while another may not consider it.
The cheapest-looking option is not necessarily the most appropriate once you consider the full funding structure, fees, drawdown arrangements, monitoring costs and exit requirements.
At Cambs Ely Mortgages, we can help you understand the options available and prepare your case around the requirements of potential lenders.
We work with a wide range of lenders and specialist finance providers, helping clients with everything from smaller refurbishment projects through to more complex property developments.
Planning a Property Development?
If you're considering purchasing a property, land or existing building for development, it can be worthwhile discussing the funding before committing to the purchase.
Understanding how much you may be able to borrow, what contribution you may need and how the lender will assess your exit strategy can help you establish whether the project is financially viable.
At Cambs Ely Mortgages, we provide specialist commercial finance advice to clients across Ely, Cambridge, Cambridgeshire and throughout England.
Whether you're an experienced developer or considering your first project, we can help you explore the funding options available.
Building Blocks for a Brighter Future.
Get in touch to discuss your development plans.
Important Information
Property development finance is specialist commercial finance and is generally not regulated by the Financial Conduct Authority in the same way as residential mortgages. The regulatory treatment depends on the circumstances and purpose of the borrowing.
Commercial finance is subject to lender criteria, affordability, valuation, project viability and underwriting. There is no guarantee that finance will be available.
Property values can fall as well as rise.
Your property may be repossessed if you do not keep up repayments on a mortgage or other loan secured against it.
Information correct at the time of writing. Development finance criteria, rates, fees and lender availability can change.