Development finance mortgages

If you’re planning a construction project, you’ll need a fair amount of cash to see the project through to completion. After all, developments aren’t the most affordable of undertakings. Whether you’re starting from the very beginning and building from the ground up, converting an existing structure, or tackling a large and impressive renovation, you’ll need funding. Of course, a mortgage is the obvious route, but you’ll soon realise that standard mortgages don’t provide the flexibility or speed you need. You can’t simply apply for a standard buy-to-let mortgage, as that doesn’t cover the work you’re planning to do. Instead, you need to focus your attention on development finance mortgages.

Designed specifically for developers, landlords and investors who need staged funding, development finance mortgages help to bring property projects to life. At Everest Mortgages, we help you to navigate the complexities of development funding, comparing lenders, structures and terms, so you can secure the right development finance for your project.

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What is a development finance mortgage?

Development finance is a short-term, interest-only way of funding construction, redevelopment or major refurbishment projects. Unlike traditional lending, the money from development finance is released in stages. These are known as drawdowns, and they’re released as the build progresses. This keeps costs efficient and ensures the project stays on track, whilst also giving you the flexibility to navigate the complexities of large development projects.

Development finance works in a similar way to bridging finance, but development finance mortgages are specifically designed with construction projects in mind, meaning far larger loan sizes tend to be available. These mortgages can be used for a wide range of projects, including residential developments, commercial builds, conversions and refurbishments, developments starting from the ground up and multi-unit buildings.

How does a development finance mortgage work?

Development finance is structured around the needs and timeline of your project, which means each application is handled on a bespoke basis. However, most development finance mortgages follow a similar pattern, along the lines of:

Initial advance – A lump sum of money is released upfront, which you can then use to purchase the site or fund early work, getting the project up and running.
Staged drawdowns – Funds are released in stages known as drawdowns, once each phase of the build is completed. Before a new drawdown is released, a surveyor or monitoring officer will inspect the site to confirm everything is progressing as it should.
Interest handling – Most development finance loans are interest-only, and many lenders allow the interest to accrue and be settled at the end. This means you don’t make monthly payments.
Exit strategy – Before you’re approved for a development finance mortgage, lenders will want to see an exit strategy. You must have a clear, viable plan for repaying the loan. This is usually done by selling the completed property or properties, or refinancing onto a long-term mortgage.

Development finance vs. construction finance

Though there are some clear similarities between development finance and construction finance, they are by no means the same. Construction finance only funds the build phase of the project, whereas development finance covers the entire project. This includes purchasing land, professional fees, construction costs, contingencies and interest.

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Eligibility criteria for development finance mortgages

Every development is unique, so there isn’t a one-size-fits-all template your project needs to fit into. Instead, lenders assess the following areas:

Deposit and equity

The deposit or equity required depends on the project and lender, but most prefer you to have a deposit of between 25% and 40% of the land or site purchase. Some lenders will fund 100% of build costs, but only if you provide additional security. For example, another property.

Exit strategy

You must show lenders that you’ve thought about how you intend to repay the loan at the end of the term. Lenders want to know how and when they’re going to get their money back. A weak exit strategy usually leads to declined development finance mortgage applications.

Development experience

A track record in development helps a lot when you’re applying for finance, but first time developers can be accepted, especially with the right team, project, plan and mortgage broker guidance.

Term length

Before approving you for a development finance mortgage, lenders want to know how long you’re going to need the loan for. Most loans run for 3 to 36 months, depending on the scale and complexity of the development.

Mortgage rates

Development finance carries higher rates than standard mortgages, due to the increased risk and complexity. The key is to secure terms that work for your project and timeline, which Everest Mortgages can help you with.

The role of GDV in development finance

GDV – which stands for Gross Development Value – is the estimated market value of the project once it’s fully completed. It’s one of the key things lenders look at when assessing your application, and they use it to determine how much they’re willing to lend you, the level of risk, your required deposit and your borrowing capacity. The higher the GDV compared to costs, the stronger your application.

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Navigate the development finance niche with expert help

There’s a lot to keep on top of when you’re applying for development finance, which is why using an expert mortgage broker is key. You need precision, experience and strong lender relationships, all of which Everest Mortgages has.

From preparing your application and calculating how much you can borrow, to matching you with the right lender and guiding you through the application process, we streamline all areas of development finance. We work hard to secure a mortgage that’s flexible, competitive and tailored to your build.

FAQs

Frequently asked questions

Can first time developers qualify for development finance?

Yes, you can be approved as a first time developer. However, some lenders require first time developers to have a stronger team and larger contingency fund, to balance the risk and offset your lack of experience.

Do I need planning permission before applying for development finance?

Yes, most lenders want you to have planning permission granted before completion. Some will consider approving you for development finance based on planning pending approval, but this varies from lender to lender.

What if the build goes over budget?

With development finance, lenders are used to projects going over budget, and most will review updated costs along the way. Some may even offer further drawdowns if the GDV supports it. To avoid the potential problems that come with going over budget, it’s a good idea to have a contingency fund in place.

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