A guide to property development finance
Depending on what you’re looking for, there’s a range of property development finance options available to choose from. In this guide, we take a close look at the finer details of development finance, to help you decide if this type of business loan is right for you.
Development finance (also known as housing development finance, property finance and development financing) is a type of short-to-medium term, secured business loan. It’s typically used for property projects, such as renovations, and conversions – or to purchase undeveloped land and build a property on it. Property development finance can be used by private individuals, property developers, and small to large businesses.
Unlike mortgage finance which tends to be provided for terms over several decades and is based on a property’s or land’s current value, property finance tends to look at much shorter time frames and is based on the projected gross value of a property or land.
When it comes to property development finance, the amount you can borrow depends on the expected value of the asset (in this case, either the property or land) once the project is complete. This is known as the Gross Development Value (GDV). Most property finance lenders will expect the total costs of the project to be 75% of the GDV or less. If the development costs are expected to exceed this, the loan application could be rejected. At OakNorth, we typically consider loans up to 55% of the GDV.
The amount a lender is willing to provide depends on the institution – some offer development finance of as little as £50,000, while others may have a minimum threshold of several times this. At OakNorth, we provide property and housing development finance from £250,000 up to tens of millions of pounds.
Once a development finance loan has been approved and terms agreed upon, the lender will release an initial sum of the loan, with further capital being released at future intervals as and when new stages of the development are complete. Interest will only be paid on the funds that have been released, so unlike a traditional bank loan, there are no monthly repayments.
It’s not uncommon for a lender to schedule visits at different intervals to get updates on how the development is going and ensure all is going to plan and on schedule.
Loan terms can typically range from six to 18 months, with very few lenders offering development finance for longer than 24-month terms. At OakNorth we can typically offer development finance for up to 36 months. There will usually be a pre-agreed grace period after a project has been completed for the property to be sold or refinanced, this is usually six to 12 months. That is why for larger developments involving multiple units, such as a large-scale residential or mixed-use project, student housing, or office space, it is important to agree on how the loan will be repaid as it is unlikely that all units will be sold on the same day. In some cases, the loan can be repaid in stages.
There are two different types of property development finance:
This is where a lender will provide the capital to purchase the land and develop the project on it – for example, the purchase of undeveloped land to build several new homes.
This is where a lender will provide the capital to fund a major refurb, conversion, or renovation of an existing property. For example, converting office space into a hotel, or converting a residence into a nursery or care home.
Some developers use development finance to invest in a large property or land purchase, which also demonstrates to lenders that there is potential to make money from their investment and be able to repay the loan with that income.
This development finance could be for as small a project as building your dream home, or a large project from a developer looking to build a block of apartments or convert retail or commercial property into residential or mixed-use.
This is development finance to develop or convert an existing property or properties into retail, commercial, or leisure space.
If you’re a property developer or you’re in the real estate industry, you might use development finance to buy a plot of land, especially if you want to act quickly and trump other potential buyers in the process. Unlike a bridging loan which typically funds the acquisition of the land or property, development finance can cover the costs of the development, refurbishment, or conversion of the new project too.
You may also go for a bridging loan in development finance, where you purchase without planning permission, with the intention of exiting by selling to a developer or refinancing onto a development facility, once planning is in place.
With property development finance, the amount you can borrow depends on the projected GDV of the property or land once the project is completed.
Let’s say there’s a plot of land for sale for £500,000 and the cost to develop five new homes on that land will be £2.5m, so the total cost to acquire the land and develop the new homes is £3m.
Then let’s say the expectation is that once the new homes have been built, each will have a projected sale value of £1m (£5m in total), so the expected profit on the £3m cost, is £2m. At OakNorth, we typically provide up to 55% GDV, which means the borrower would be able to apply for a loan of up to £2,750,000 – or 55% of the projected GDV of the project (£5m).
There are costs to be aware of when looking for development finance:
Lender arrangement fee: given the costs involved in underwriting and doing the credit analysis for development finance, many lenders may charge a fee for setting up the loan
Professional fees: when it comes to development finance in the UK, there are usually several professionals involved in the project, such as: solicitors, architects, and project managers. These costs will depend on the scale of the project and can be included in the development finance loan.
Interest: as mentioned earlier, interest will be charged monthly but will only be payable on the funds that have been released.
Broker fees: if a broker was used as part of the transaction, this will likely incur a fee.
Valuation fees: to calculate the GDV of a project upon completion, a lender will usually require an independent third party to undertake a valuation.
Monitoring fees: as noted earlier, lenders will often monitor the progress of a project to check that it’s all going to plan.
Exit fees: this will vary from lender to lender and is typically charged as a percentage of the total loan repayable sum at the end of the loan term.
Non-utilisation fees: as lenders are reserving funds for you instead of lending the money to someone else, they may charge a non-utilisation fee to compensate for this.
The main benefit of development finance is its speed and the fact that interest will only be paid on the funds that have been released, so there are no monthly repayments. Of course, the other side of the coin here is that because of this, development finance tends to be more expensive with several other costs as outlined in the previous section.
We typically provide funds within weeks of application, rather than months like some lenders.
Our business loans are tailored to what you need. No off-the-shelf solutions or ready-made products.
Get full visibility on how your loan application is progressing and depending on the loan size, you could meet the decision makers face-to-face at Credit Committee.
Applying for development finance with OakNorth Bank is easy: all you need to do is fill out this short online form, and a member of our property finance team will get back to you.
At OakNorth, we provide quick ‘yes’ or ‘no’ decisions and deliver funds in weeks rather than months. Whether you’re a property developer or investor, at OakNorth, we’ve provided development finance to convert offices, release equity for new acquisitions, build student residences, turn vacant buildings into new homes, and much more. We’ll work with you to create bespoke business loan facilities ranging from £250,000 to tens of millions, so you can get moving quickly.
Not sure which financing is right for you? Read about the range of options available in our complete guide to business loans.