When you want to build your dream house, you have to be mindful of expenses. From the lot to the construction of the house, everything can get costly. If you’re on a tight budget, then every penny spent is very important.
The thing is, financing a property development project requires much, much more money. Even if you have enough savings, there are still unexpected expenses. So, many people prefer going for a loan to finance their development projects. This article is a guide to help you understand more about property development finance loans.
What is Property Development Finance?
Property development finance is a type of financing you can use for purchasing a plot of land, construction projects, and refurbishment projects. Some of these financing projects are very specific, which means lenders can only finance a particular project.
For example, if you’re only renovating your home or store, you can just apply for short-term loans. However, if your development project lasts for a longer time, you might want to apply for a long-term loan. Therefore, when asking for funds from lending companies, the duration of the said project is an essential criterion to which lenders decide if they want to lend you money or not.
“It’s also possible to get commercial property finance, should you be looking at purchasing a mixed use property for example,” comments Ruban Selvanayagam of commercial sales brokers Property Solvers.
What type of loan to go for?
Property development finance helps you with funding your development project. However, the amount to be offered by lenders varies depending on the type of loan you choose.
Also, the time span you have to pay back the money depends on the loan term you applied to avail. You can expect to pay back the money in full immediately (short-term loans) or for a year or so (long-term loans).
When applying for any type of financing, it’s best to have it all planned out in terms of cash flow, timelines, and itemized budget.
This type of mortgage allows property owners to rent their property off to others. Like letting your property be rented out as a retail store, an apartment, or even the whole property. Buy-to-let mortgages only allow you to pay interest for some or all of your payments.
If you’re planning to sell off your property after its development, then you can try applying for buy-to-sell mortgages. This loan offers a higher down payment than other loans. However, they have flexible payment terms, depending on when you sell your property or when you are ready.
Bridge loans are the preferred financing loan for most people. Bridging loans are beneficial when you apply for a loan and pay it over a short period. For example, it serves as a gap when you want to buy a new property but haven’t sold your current property.
There are open and close types of bridging loans that usually offer different payback periods. Bridging loans can be more expensive than other mortgages, but they are very flexible regarding the type of property you want to fund.
Commercial Property Finance
Commercial property is used for businesses such as retail stores, offices, and even apartments. So this kind of property usually offers much higher collateral than normal or residential properties.
Commercial borrowers usually have a much easier time getting finance by just putting up their commercial property as collateral for the loan. However, borrowers should also make payments on time to avoid consequences like repossession and foreclosure.
The term “mezzanine loan” is a French word that means the level in between upper and lower floors. In the same manner, mezzanine loans are loans that cover risks normal commercial mortgages cannot cover. For example, if you have a property development project and want to use it as collateral, you can try applying for a mezzanine loan.
This type of loan is typically for corporate purposes. So, mezzanine lenders do not consider residential property as collateral for their loans.
Development Finance Loans
Development finance loans are usually made available by the government or non-government agencies (NGOs). Unlike the previous loan options, development finance loans aren’t meant for individuals. Instead, they’re aimed to help businesses with property development projects.
Specialized Property Loan
This is a type of loan done privately by lending companies that still follow regulations from finance authorities. Since it is privately handled, the interest rate can be lesser than the regular mortgages being offered.
Personal loans, also known as unsecured loans, offer funds given immediately with a fixed payment amount and should be paid before the contract ends. Although it can be easily acquired, the unsecured status of personal loans can be problematic at times.
Generally, financing a property development project can be challenging. But with development finance, securing financial backing won’t be as tough as you imagined it would be.
The only questions that remain are what type of loan and which lender suits you best?
Reach out to our group of experts and allow us to ease your burden. We can give you expert advice on how to access different development finance loans in the UK.