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Property development loans are a type of finance that is used to develop property a property development loan allows you to pre-fund your development by allowing you to make predetermined drawdowns as the development progresses, they differ from a traditional loan in that you do not get the whole loan amount in one go, the way this works is that the lender will make an advance against the site or property that you intend to develop and then make further advances according to how much work you have carried out this would be quantified by the lenders surveyor before the funds are released as security for the loan, these drawdowns can be at key construction stages such as when you get up to dpc, then when you have finished the actual shell, another would be when the roof is completed and then after you have done the first fix, then second fix and finally at practical completion.
A Property development loan is usually for a twelve month period they can be extended for up to eighteen months but most lenders would initially grant a loan for twelve which is more than enough to get your project built twelve months is normally enough time to build up to five properties if there are more then the project would normally be phased, once the development is completed most developers if they have not sold all of the units, would then arrange finance through what is called a developer exit loan, this is a form of bridging finance that is considerably cheaper than a development loan, the reasons for this are that once the development is finished and in a saleable condition then a lot of the risk associated with a development loan has been reduced in the eyes of the lender.
Costs & Interest for a Property Development loan.
Property development loans come with the following costs that you will be expected to pay by the lender.
Arrangement fees of up 1- 2% of the total loan amount would be payable, once you make your first drawdown, if it is a high street bank then they would expect you to pay this amount before you made your formal application for a loan, with a specialist lender you would only have to pay this if you actually took the loan out, High street banks would also ask you to pay an exit fee on top of this amount which could be as high as 2% of the GDV (Gross Development Value) this is the total resales value of the properties you are selling, specialist lenders generally do not charge an exit fee.
Valuation, all lenders will expect you to pay for a formal valuation this will be carried out by a surveyor and include such things as the value of the site/property as it stands the value when the development is completed and also take a look at what your costings are to see if they are viable for the development of the site.
Legal fees all lenders will expect you to cover their legal costs, they will agree to an amount with you before you apply for the loan, you will also have to factor in the costs for your own legal fees.
Interest amounts will be agreed with you and these can range from as little as 4% per year although this very much depends on how much you are looking to lend as a percentage of costs the higher this figure the higher the interest rates will be, a high street bank would usually go up to 60% of your costs, whilst a specialist lender can go as high as 90% of costs but with a higher interest rate to reflect the additional risk that is involved at this level of lending, the location and desirability of the properties will also have an impact on the rates on offer to you.
Who can apply for Residential Development Loans
As long as your project stacks up on costs and profitability anyone can apply, you will need to show a good business acumen and demonstrate to the lender that you have the ability to complete the development in time and on cost, if you run over on costs they will also expect you to cover these out of your own pocket, only in very rare circumstances will they offer loans over and above what has been previously agreed.
What can you do now?
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