Development finance is a flexible way to fund property development projects, allowing borrowers access to capital faster than traditional banks. Typically, development finance does not adhere to such strict lending criteria meaning that finances can be obtained more easily. This type of finance typically allows the borrower access to greater sums.
What Is Development Finance?
Development loans are a type of finance used to fund property ventures. They can be used for a variety of different project, including renovations, conversions, property development and more.
Development finance can only really be used for larger property ventures, and therefore isn’t appropriate for single home refurbishments or other, similar small-scale projects.
Development finance is a short-term loan, usually available for 6-24 months, the precise duration agreed by the lender subject to the property development project in question. The longer the loan term is, the more interest is added, typically being charged monthly by the lender. There’s a range of different ways to repay for a development loan, including interest only, rolled up and development exit finance.
Funding Development Finance: A Two Part Process
Typically development funding works in two parts.
- Land Costs
The first is securing the development site and providing the funds to cover this. This may be a plot of land where a new build will be built or an existing property that developers are wanting to refurbish. Typically, lenders will contribute towards a percentage of the land costs. - Build Costs
The second stage of the funding is covering all of the costs of the building works for the project. Depending on the agreement made, this typically happens monthly to cover ongoing costs rather than one lump sum. The majority of lenders will offer a maximum of 75% of the total build costs.
How Much Funding Can Be Secured?
If you come across an opportunity to build, renovate or develop a property, Octagon Capital can give you access to capital in order to help fulfil your project. The amount you can borrow is based on the Gross Development Value (GDV), the estimated value of the project upon completion. With Octagon Capital, you can apply to borrow up to £25 million towards your development finance project. This figure is based on around 100% of build costs and 50% to 70% of the land costs.
The amount of funding available varies depending on multiple factors including the type of project, how experienced the developer is, and the forecasted costs of the build. There is an Independent Monitoring Surveyor (IMS) who works on behalf of the lender to oversee budget and time-frame. The costs of the IMS will also be incurred by the borrower.
3 key factors that will be considered before any development loan:
- Current value of the site (pre-development or pre-refurbishment)
- The build costs
- The gross development value after the works
Other factors vary from lender to lender but may include:
- Maximum loan amount
- Length of loan
- Interest rate
- Proportion of borrowed money out of overall costs
Is Development Finance Right for Me?
Development finance is good for substantial property ventures. It can be used to cover a range of different costs associated with the project, including the building costs and land purchase.
While lenders like to see experienced developers applying with an extensive portfolio of past successful projects, first-time developers can also be eligible for this type of finance, provided they meet all of the eligibility criteria set out by the lender. The eligibility criteria for development finance can include:
- You must be based in UK, Scotland or Wales
- Must be a limited company
- You must have information including GDV, construction and site costs
Why Choose Octagon Capital?
Octagon Capital offers a personalised approach. The initial meeting allows you to outline your project with one of our team members. From that we can assess your needs and set about finding the best course of action to see your project plans into fruition.
Contact us at Octagon Capital to explore the best options for development finance
