Property Development Finance Rates
Development finance rates development finance interest rates can vary enormously depending on what you are looking to finance, location and type of development be it residential, commercial or a mixed scheme with both residential and commercial elements. Pre-financial crisis in 2008 it was mainly banks and a small number of financial institutions that offered property development finance, the best rates were always available through a high street bank these tended to be approximately 1-2 percent above the base rate at that time which on average was 4-6% so finance was being offered at around 5-6 per cent interest however these always came with both an arrangement fee and also an exit fee based on the total sales of the development you could expect at least 1 percent arrangement fee for a 12 month development program and 1.5% for an 18 month loan, exit fees which are based on the total amount of the resales values could also be 1-2% of the resale values, when taking these fees into account you have to weigh them up against the interest rates on offer and look at the overall picture to make a reasonable comparison generally speaking they would look for up to a 10% return on the equity they were providing for your property development.
After 2008 bridging loan lenders and a large number of specialist lenders started offering finance with rates higher than the banks but with differences on the arrangement and exit fees these ranged from 6 % Per annum up to 12 % for finance at a higher loan to value often going as high as 90% of all costs involved in the development, banks will still offer a more competitive interest rate but borrowers should make sure they are looking at like for like when taking out property development finance. As a rule of thumb a high street bank will only go up to 65% of your costs and some will also want you to put all of your money in on day one so this would mean often you would have to cover the whole of the cost of the site acquisition costs from your own funds and then they will finance the rest of the build costs as the development progresses, few developers are in a position to fund in this way but if you are happy to put all of your cash in on day one you will get a better interest rate but is this the best deal for you, the other issue is high street banks will only offer finance for known clients and they will have to have a very strong track record of previous developments that have been completed on budget and sold, if you keep the properties as an investment this would not qualify you as an experienced developer.
Below is an example
Total Sales value of all the properties in the development £1m
Finance @ 60% for GDV £600,000
Arrangement fee 1.25% of £600,000 Total £7,500
Exit Fees at 1.25% of £6000,000 Total £12,500
Interest at 5% of the loan amount over the period of the finance note this will be only on the amount you have drawn down on the loan as development progresses, so you would have approximately £400,000 of drawdown over the period up until completion of the development.
So £400,000 x 5% giving an interest rate payable of £20,000
This gives you finance costs of £40,000 on a £1m development.
Specialist lender or bridging loan for property development.
Total sales value is £1m
Finance at 60% of GDV Note these lenders will offer up to 90 % of all costs although interest rates at this level will be more.
So finance at 60% of GDV is as before £600,000
Arrangement fee will be 2% total cost £12,000
Exit fee zero as these lenders do not charge any exit fees.
Interest at 7% of the loan amount as it is drawn down as before this would average out at £400,000 over the loan period.
So £400,000 at a 7% interest rate gives you £28,000 in interest to pay over the loan period.
This would give you total finance costs of exactly the same £40,000
Also, you have to bear in mind that specialist lenders are far more flexible in who they offer to fund and are more than happy to offer finance to first-time developers as well as experienced developers.
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