100 percent Development Loans
100% development finance loans are aimed at UK house builders, who having purchased the land then need to fund the build costs of the development construction site.
Lenders will typically use the Final / end development value of the construction site and lend roughly 65% of the end value, towards the build costs. They use the initial starting value of the land purchased as abase starting point and then lend against the value of the site increasing as properties are built.
Development Loan example
Lets say you purchase some land with planning permission for £500,000, and to keep things clean we will just accept that you had that cash available at the outset in order to buy it.
( some lenders and landowners will agree to a deferred purchase whereby you purchase the site in stages as the site progresses, please contact use about that as it gets too complex to outline here and of course requires careful negotiation and contracts in place to facilitate it).
Lets say your build costs are £150,000 per property so you need 10 x £150k , but you dont need it all at once on day 1.
Lenders will advance upto 65% of the GDV ie £2.5m x 65% = £1,625,000 towards the build costs.
so a typical development loan example layout might be
- Site value day 1 = £500k for 10 plots ( equals £50k per plot)
- Lender will lend 65% of that = £325,000
- That should be enough to build at least 1 if not 2 of the 10 houses
- Stage 2 = 2 x houses completed valued at £250k each = £500k for the houses plus 8 plots remaining at 8 * £50k = £400k = site now worth = £900k
- Site value £900k x 65% = £585k minus £325k already leant = new net loan available of £325….. which allows you to build the next 2 x houses
and so it goes on, until all the houses have been built out.
Note during the property construction, you would also no doubt be selling some properties and therefore may not always need to go back to the lender for more funds, as you would be able to recycle the profits back into building the future houses.
100 percent building funds
So as you can see the development finance lender has funded 100% of the actual build costs of the properties in that example above. That is / would of course always be typically restricted to 65% of the site value at any given time. The overall principle though is the lenders will happily fund property building sites to ensure they get built out. That way you make the profits from the sales, and they as the development lender get repaid their loan.
applying for development finance
When you are thinking about applying for property development finance it pays to do your research. This means making sure any plans and financial and timeline projections have been thought out and any potential issues noted.
Lenders base their decisions to lend on the feasibility of the project, which means its important to ensure that you can demonstrate your construction site has the capacity to generate income and profit.
If you are experienced in property construction, then hopefully you can demonstrate a good track record, but, if you are new or aspiring to take on larger projects , then you may find lenders will view you with caution.
There are always exceptions though and a lack of experience or knowledge can be made up with some accurate and well-researched cash flow projections based on criteria your lender will understand.