Development finance: back to basics

There are a range of options when it comes to property finance, including the likes of bridging, self-build and development finance.

These products all have their specific uses and can be used to improve properties, for the quick purchase of a property and to convert existing properties into something more profitable and with better prospects.

Development finance, however, is an offering designed specifically for the kind of works that are required to develop properties to improve their overall value, thus allowing them to be more profitable when sold or rented out. This tends to be via refurbishments and renovations, with some specialist lenders willing to lend up to 75% of the loan-to-value (LTV), according to SPF Loans.

For example, there may be a warehouse or set of industrial units that are derelict. Rather than just leaving them as they are, the owner of the plot may decide – with the correct planning permission in place – to develop this plot into a collection of residential housing units. This may cost hundreds of thousands even millions of pounds meaning the developer may not have such a huge sum available.

To be able to afford the works on the plot, the owner could seek refurbishment finance, which would allow sufficient renovations to be made; including the addition of kitchens and bathrooms where required, to facilitate new tenants in the newly converted set of properties.

Property development finance tends to be used for a number of development-related purposes:

•    Purchasing land upon which the development is or will be built upon
•    Paying for extensive refurbishments to improve a property and its value
•    Providing funding for the conversion of a property into residential properties to be sold on or rented ou

The amount that lenders will lend tends to be heavily dependent on several factors. For example, the overall value of the property or development is very important as lenders will only provide funding up to a percentage of the value of the property in question. Lenders will also assess the gross development value (GDV) of the property. This is the assessed value of the finished project.

This is important because if, for example, the work to a property worth £500,000 will increase its value by £100,000, the lender may be willing to lend more than if the property’s value was to be unchanged. Many specialist lenders will also have teams for dedicated categories of these kinds of loans. This means that when applying for the loan, you will be in the safest and most knowledgeable hands.

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