There are plenty of questions to answer if you’re considering property development, but whether you’re a developer, an investor or a landlord, there are a host of options to consider when you are seeking property development finance and the process can seem quite daunting. In this article we aim to simplify this process by highlighting some of the pros of cons of each option.
Commercial Mortgages
Commercial mortgages are the usually the easiest to understand as they are structured in the same way as a residential mortgage that most people are familiar with. Commercial mortgages are often used by a business to purchase its premises.
Pros of a commercial mortgage:
- Commercial mortgages typically have lower rates than unsecured business borrowings
- Commercial mortgage payments are tax deductible for businesses
Cons of a commercial mortgage:
- A large deposit can be required if you have no other security to offer
- Variable rate mortgages can leave you vulnerable to interest rate rises
- All maintenance costs, insurance and security costs would have to be paid
Another use for commercial mortgages is where buy-to-let lenders can combine multiple properties into one commercial mortgage. This can cut arrangement fees through economies of scale and keeps one point of contact for the mortgages.
Auction Finance
This type of lending is used when buying property through auctions. Property can be picked up at discount prices through an auction, however the funds are usually required within 28 days. Lenders that specialise in auction finance can get you the funds quickly- sometimes within a week.
Some lenders will also guarantee finance before the auction so you can turn up with an “agreement in principle”.
Pros of auction finance:
- Quick access to funds in order to secure discounted properties
- Suitable option if equity is tied up elsewhere
- Provisional acceptance will give confidence at the auction
Cons of auction finance:
- A deposit may be required depending on the deal terms
- A strong track record of deal financing would ease the process and options
- May involve added security requirements for first time developers
Bridging Finance
Bridging finance is typically a short-term business loan. It’s usually a temporary loan which buys the developer time until they can clear the loan in full or secure a more permanent source of financing. Bridging finance is also used at auctions if developers want to skip the traditional auction finance providers.
Pros of bridging finance:
- Funds can be available in 24-48 hours
- Can be used for short term commercial projects if an exit strategy is clear
- Payment can be deferred or “rolled up” into a lump sum at the end of the term
- Flexibility of payment options
Cons of bridging finance:
- Due to the specialist nature, interest rates are typically higher
- May incur additional fees
Development strategies
There are many strategies for property development finance and the bridging loan is most common for serious property developers. Specialist options such as the “refurbishment bridge” are available which will fund 3-24 months of building costs and can come with the option to convert to a mortgage further down the line. This type of funding would cover the majority of light and heavy refurbs.
For more extensive projects and ground-up developments, you can find development finance to cover both land purchase and building costs. An example of this would be if a developer wants to buy a plot of land for £100,000 and spend another £400,000 building properties on it. The lender may agree to finance 50% of the plot and 70% of the build.
Landlords with development experience can also use property that they currently let as security for further lending. With enough equity available in your portfolio you can leverage that to grow your portfolio without requiring liquid cash.
