How does property developer finance work?

The majority of developers, who may be taking their first steps into the property market or looking to expand their existing portfolio, will rely on some type of finance to help them fund their next project.

Property developer finance, most frequently known as development finance, involves loans that are specifically designed to fund property development – whether that’s the construction, conversion, or refurbishment of buildings.

Developer finance typically takes the form of a short-term loan that’s released in stages to fund each part of the build, under close inspection by the lender. Once complete, the developer usually repays the loan through selling the property or refinancing.

There is a wide variety of property development loans available, so if you’re hoping to kickstart a property development career or expand your listings with a larger project, there’s sure to be a suitable property developer loan for you.

Here is a summary of some of the most common types of property developer finance and how these options work.

Development finance

When it comes to ground-up developments, which involve building a completely new property from the ground up, standard development finance generally offers around 70% of the estimated final value of the planned property.

Residential development finance provides a loan for developing a property or multiple properties for private residential use, from a single house to a block of flats, whether the residents will be buying their home or renting.

Similarly, commercial development finance provides funding for commercial property construction – from retail units to offices to industrial buildings. These are likely to be sold or leased for business use once completed.

Second charge loans

Second charge loans, sometimes known as secured or second mortgages, are essentially an extension of or top-up to the existing loan. This type of finance is used when changes are being made to the original property.

Rather than re-mortgaging completely, a second charge loan can help the developer or new owner to refurbish or renovate the property to improve its quality and market value. This would be secured against the property value.

The amount of finance you can secure with a second charge loan will depend on how extensive the building works are going to be. For example, loans for light refurbishment will be smaller, while loans for more significant work may be larger.

Buy-to-let finance

The primary routes for most property developers are to build or renovate properties to sell on for profit, or to build or buy properties to let. If you were looking to improve a property with the aim of renting it out, you would need buy-to-let finance.

While a standard loan would be calculated based on the final estimated value of the property, a buy-to-let loan would only be based on the property’s current value. These loans tend to require a larger deposit and come with higher interest rates than high street mortgages.

This is a good way of leveraging existing capital if you are a landlord who wants to expand or convert existing property, but borrowers must be sure that the proposed rental income will comfortably cover not just the repayments, but also all other costs, such as maintenance and taxes.

Bridging finance

As the name suggests, a bridging loan is a type of finance intended to ‘bridge’ the gap between purchasing a new property and selling an existing one, whether they are different properties or the same one being refurbished or renovated.

These short-term loans are designed to be set up quickly and paid back within a shorter time frame, typically once a larger and/or longer-term loan has been secured. They’re supposed to assist with cash flow rather than finance the entire project.

A bridging loan may be suitable if you need a temporary solution to secure funds fast and keep your development project on schedule. However, these loans do tend to be interest-only and come with a higher interest rate.

Commercial mortgages

Like a high street mortgage, a commercial mortgage is a property developer loan that can be used to purchase and/or refurbish a commercial property. This could be anything from a shop or an office building to a warehouse or factory.

Commercial mortgages help developers to spread the cost of a large property purchase over a number of years, with an established repayment plan and an interest rate based on the property’s value. Some landlords can use these to cover multiple buy-to-lets at once.

In most cases, an existing business will apply for a commercial mortgage to purchase their own premises, where their business operates. It can be more challenging for new ventures, as lenders will use business income and assets to determine the applicant’s ability to repay.

Considering property developer finance?

Being a successful property developer means being a comprehensive planner – getting the right development finance in place to support your project is just one part of the process, and will require careful planning in itself.

There are many factors you’ll need to take into account, from the scale of the project and its costs to your own financial history and the current state of the market. You’ll need to figure out the appropriate funding option for the specific circumstances of your development, and provide a robust business plan with your application.

From getting planning permission to arranging a Building Warranty in advance, it’s important to provide as much information and get as much paperwork sorted as possible to make sure your application is airtight, boosting your chances of successfully securing property developer finance.