Borrowers will need to repay lenders according to the agreed term after the sale of the property. One of the greatest advantages of development finance is its flexibility for borrowers meaning that there are many different repayment options. In certain cases, an extension can be provided in order to give more time to secure the sale although this may incur additional costs.
When Do I Have to Repay the Development Loan?
At the beginning of the financial agreement, a repayment plan including timescales is agreed by both parties: those lending the money and those borrowing.
As part of this, lenders will want to see an ‘exit plan’ before agreeing to the loan. Development projects are usually repaid through sale or refinance.
Most common exit routes:
- Build to sell (sale of the finished property)
- Refinancing using a developer exit product
- Long term refinancing (including build to rent)
When Do I Pay Interest on the Loan?
You will typically pay the interest on this type of loan at the end of the loan term. As previously mentioned, the way your repayments on the loan work will vary depending on the details of your application (including your exit strategy).
The monthly interest on the loan will typically be rolled up and added onto the total amount owed by the borrower, to be repaid via the method agreed by them and the lender during the loan application process. This way, the interest is repaid on top of the rest of the loan at the end of the loan term.
How Much Interest Do I Need To Pay?
There is not a set rate for property development finance. When seeking this type of funding, you will be matched with the best lender for your project needs from a panel of specialist property development lenders who will negotiate the best rate for each proposal.
As such, interest rates will vary from lender to lender and depending on the specific details of the project. A reasonable starting point is around 6.0% interest rate. Typically, this can be rolled up into the loan to avoid the necessity for monthly payments.
Most facilities are set up to allow monthly interest charges to be repaid once the loan is redeemed. The interest is added to the facility, rather than the developer, so they can focus on the project rather than payments.
Thus, interest is payable upon completion of the project and the agreed exit strategy. If any units of the development are sold before the end of the project, those proceeds can also be put towards paying off the outstanding amount.
What Repayment Methods Are Available?
There are a variety of different repayment methods available for a development loan, each option coming with their own pros and cons, and types of borrowers they’re best suited to. Some popular repayment methods for development loans include:
- Interest Only
- Rolled Up
- Development Exit Finance
Interest Only
Most development loans are arranged on an interest-only basis meaning that at the end of the works you need only repay the interest accumulated throughout the duration of the project. Development loans are typically short-term loans (between 6-18 months) so at the end of this period you would pay the interest. Eventually, you can pay off the full loan either as a lump sum or with higher monthly payments. This usually coincides with the sale of a unit or multiple units of the development.
Rolled Up
Rolled up interest payments mean that you pay everything back at the end of the project in one lump sum. This negates the need for monthly payments and allows developers to focus solely on the completion of the works. At the end, with the agreed exit strategy, they will pay back the loan with the accrued interest.
Development Exit Finance
Exit finance allows you to repay development finance before the sale of your development, should you choose to do so. Exit finance typically holds a lower rate than development finance. The key reasons to use this type of financing are:
- Reducing costs and increasing the profitability of the project
- To act as a buffer if your existing development finance is coming to an end and will not cover the end of your project
- In order to free up capital earlier leaving you more capital to fund future projects
Contact us at Octagon Capital to explore the best options for development finance
