StockHow does property development finance work? – Mike Collins Mortgage Broker

November 8, 2022

Financial consultant Mike Collins explains how you can kickstart a large-scale development or buy-to-let property with help from property development finance.

If you’re looking for a short-term property loan, property development finance is used for funding commercial, residential and mix-use projects,” he said.

Perhaps you’re knocking down and rebuilding? Property finance is an umbrella term that applies to a variety of finance options such as mortgages, bridging loans or personal loans but refers to significant building or renovation works.”

Read on to discover more from Mike Collins about some of the finance options available.

Work out which finance options suits your situation

If you’re new to the whole property finance world, first work out which finance option will suit you most. Today, I’ll be looking at these options:

Working on a larger project with big construction costs? A property development loan might be the way to go.
Dying to buy your dream home but not sold your current one? Perhaps you want to buy a doer-upper? A bridging loan could offer a solution.

Who is eligible for private property development finance?

 If you want to renovate a residential property but don’t have the cash right now, private property finance can help. Individuals, property developers and building firms can all apply.

Whether you are eligible or not will depend on either a detailed business plan or a good credit rating. A good investment strategy also helps.

Raising finance

There are a few ways of raising finance for your development plans.

A bridging loan is often used for light refurbishments (e.g. decorating or a new kitchen) rather than heavy works such as a conversion or structural alterations.

If you already have a mortgage on your property, you could consider a second charge mortgage to allow you to leverage capital accumulated in your property through your existing mortgage to raise more cash. The only problem is you’d be paying off two mortgages but it could save you from paying early repayment charges.

How does a bridging loan work?

With bridging finance, you get a short term one-off loan to ‘bridge’ a gap in cash flow.

Bridging finance would be more appropriate if you’re looking at a lighter refurbishment as mentioned above.

If you need cash quickly, this is also a great option with money available in as few as three days. However, interest rates are high – but can be affordable due to their short-term nature.

How does a property development loan work?

Unlike a bridging loan, a property development loan is paid out in stages, with funds released once key parts of the project have been completed.

You may be able to qualify for more money with a property development loan than other types – and that’s why it’s the preferred choice for major works.

A development loan comes in two sections:

Cash to purchase the site – Usually the first lump of cash someone will need is used to assist with the purchase of the development site. It could be land for a series of new properties to be built on or an existing property that needs refurbishment.
Money to fund the building costs – The second part of the loan is used to pay for any building work costs associated with the project. It can be handed out in stages (staged drawdown) rather than one whole amount. This often happens once a month as works are completed on the project.

The development loan is agreed at the outset and repaid via the sale of the property or mortgage finance.

 

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