Arranging property development finance is often the biggest challenge you will face as a developer.
Frankly, the best way to cut through the crap and get finance is to work with an excellent broker...
That said, in this article, we’ll attempt to demystify the process and reveal several different solutions.
If selling a property within a short time of purchase is your intention, the best option available to you is to engage in short-term property development loans.
For this to be feasible, a minimum of 20-25% deposit is required and you’ll have to set aside an extra amount — approximately 2% of the property development loan amount for fees.
Fees are always changing, but gives you a good ballpark. There will be a comparatively high interest rate also; expect to pay somewhere between 0.7% to 1.5% per month.
This type of finance is called property development finance and is perfect for properties that are yet to be occupied and clearly need renovation.
In contrast, mainstream mortgages require that a property be certified fit for living before lending is agreed. Unoccupiable properties are usually not approved for mainstream lending. For example if the property has no services, no kitchen or no bathroom, asbestos, etc.
You’ll have the option to purchase on a “buy to let” basis if you wish to rent out the property after a purchase is done. And if you choose to sell it at any point in time, some of these products come with low or no redemption fees.
Be warned though that these mortgages are not really designed as a short-term solution for buying and selling, and you’re actually obliged to rent it out. For this reason, the property must be certified habitable by the provider of the property development loan.
What this means is that it needs to be secure, with a functional kitchen, utilities, and a bathroom.
You’ll have to put down a minimum of 25-15% deposit; any less will incur higher repayment charges. Going for this option means you will probably own your own property already, but if you happen to be a first time buyer, you’ll have the option of "buy to let" mortgages with a few different lenders.
The last option available to you is to purchase with the aim of residing in it on a main residential mortgage. This comes with up to 95% LTV -- as long as you don’t already have a residential property.
If however, you do have one, you must have a minimum 10% deposit available and can afford the new mortgage as well as any other pre-existing lending. Also, the property must be certified habitable by the lending partner.
It is important to note that the more deposit you make, the better because a deal at higher LTV usually has repayment penalties attached -- which you’ll be willing to avoid if you decide to sell the property in that period of the time.
But if you make a 25% deposit, which is ideal, it means you may be entitled to deals that have little or no repayment penalties.
“Buy to sell mortgage” is the term commonly utilised to describe a short-term property development loan necessary for the purchase of a property which is sold as soon as possible. There are a few reasons why investors might prefer this type of property development finance.
In general, borrowers tend to show more interest in mortgage products from the large, high street lenders rather than the small societies they have never heard of. This is really not recommended for anything but the most basic of cases because these products are generally “one size fits all” affairs.
In short, their products are typically restrictive in terms of fees, rates etc and you’re the one that needs to be flexible to accommodate the lender, rather than the other way round.
For a medium term investment, the mainstream mortgage is more suitable, as a 2-3 year deal isn’t much of an issue because it is not your main goal to sell and pay the mortgage off in a particular period in time.
Property development loans are for those that need to pay it off within a few months, or for medium term investors on properties that need to be renovated and are not habitable as at the time of purchase.
The lenders that offer these may have less of a high street presence but are no less secure or reliable.
Being able to access the entire market and an expert to advise you in the area of short-term finance can save you so much money, time and be the thing that stands between your project succeeding and not even getting off the ground.
Property development finance can be hard to come by for properties that need renovation. In cases where the property is not habitable, the lender may decline the application. The property is considered habitable if it meets certain criteria which are as follows:
If the property lacks these amenities, there is the likelihood it will be rejected for “regular” mortgage purposes.
Property development loans can be offered by specialist bridging finance companies and provide the necessary lending assistance to those willing to buy to renovate and sell a property for a much higher price.
Their calculation for this type of property renovation finance is based on when “done basis.” What this simply means is that if your property is currently valued at £200k and your plan is to renovate and sell in about three months time for £250k, the lender of the property development loan will make use of the £250k valuation. Your surveyor will obviously have to agree with the numbers you come up with.
This is the perfect course of action if you plan to pay the property development finance back as quickly as possible, as auction finance is intended for precisely that reason.
The interest rates for this type of property development finance are a lot higher compared to a standard mortgage so you need to have a plan in place to pay the loan back quickly.
Your exit strategy will usually be to either sell quickly or to refinance with a mortgage as soon as the property is habitable.
Quite a number of developers make use of this kind of property renovation finance to buy and sell.
So, to boil all of that down, if your intended property is “habitable”, you may be able to finance your project with a regular buy to let mortgage.