How does Development Finance work?

What is a development loan?

A development loan is a short-term funding option, usually for between 6-24 months. It is designed specifically to assist with purchasing and building costs associated with a residential or commercial development project.

This can be a new build, conversion, or refurbishment covering a single unit through to multiple units built across a number of phases.

At MSP we offer several specialist development loans that can all be tailored to your needs.

The loan comes in two parts

1. To purchase the site

The first element of the funding will often be used to assist with the purchase of the development site. This could be land where a number of new properties will be built or an existing property that will undergo a refurbishment.

2. To fund the building costs

The second stage of the loan is used to pay for the costs of the build works associated with the project. This is usually drawn in stages, as opposed to being given in one amount at the outset. This often happens once a month as works are completed on the project.

How much funding can you get?

The amount of funding that can be provided will be determined by a professional valuation report that will provide 3 key numbers:

  1. Current value – i.e. the value of the site with planning or the value of the property before refurbishment
  2. Build costs
  3. Gross development value (GDV) – i.e. the value of the completed property(s) assuming all works have been completed.

Each lender will have its own lending parameters that determine the maximum that can be lent. At MSP we will lend up to 65% of the current value and 100% of the build costs for all our development loans.

Each deal is assessed individually but the funding must be structured in a way to make sure there is enough funding in place to complete the build in its entirety.

Developpement Finance

Are there extra charges?

The lender will charge fees and interest for the Loan with the amount of the charges depending on the:

  1. Amount borrowed
  2. Percentage borrowed against the overall costs – i.e. the current value and build costs combined
  3. Term the loan is required for.

What is the usual term for Development Finance?

Most development loans will be for a period of up to 24 months, but this will be dependent on the nature of the scheme being funded.

A straightforward refurbishment loan may only be required for 6 months, whereas a multi-unit new build may require 24 months. The term of the loan will allow time for the property to be purchased, developed, and then sold or refinanced to repay the debt.

Using an Independent Monitoring Surveyor (IMS)

Once a project is up and running, the building costs part of the loan is drawn down in stages (usually monthly). How much is drawn down will depend on the value of work completed on-site that month. The benefit of drawing down amounts monthly is that you’ll only pay interest on the total amount drawn at that point in time.

The IMS will act as the ‘eyes and ears on the project for the Lender to make sure works are progressing on time and on budget and will flag any potential issues. They will be acting for the Lender, but their costs will be payable by the borrower.

How to repay Development Finance

There are several ways that borrowers can repay their Development Finance loans:

  • Repay the full amount using sale proceeds from the finished property(s).
  • Refinance on to a long-term loan if the borrower wants to keep the finished development for themselves or to rent out.
  • Refinance using a Development Exit Bridging Loan to crystallize profit at a lower rate and potentially fund another future project without having to wait for the sale of the current project. You can find out more about our Development Exit Bridging Loan here.