How does it work?
Development finance is a kind of bridging finance which is specifically designed for property development. To demonstrate how it works, let’s imagine you’re a developer and you want to buy a piece of land to build some flats on.
The land costs £100,000, and you’ll need £300,000 to build the flats ready for sale. A property development loan will help you pay part of the land purchase cost and then help finance the costs of building the properties.
Property development finance usually works in stages, so the lender will lend you chunks of money once you get to different stages of the development – for example, after you’ve bought the land or laid the foundations etc.
Once you’ve sold the flats, you can pay the loan back plus the agreed interest.
Gross development value
The lender will use the gross development value (GDV) to work out if the project is lend-worthy. The GDV is the estimated value of the finished property if it were sold on the open market in current economic conditions.
Generally speaking, if the total build cost exceeds 75% of the GDV, they might not be willing to lend.
What kind of projects does it cover?
Development finance can be used for heavy refurbishments or ground-up developments:
- Heavy refurbishments generally cover cases where you’re changing the size or use of an existing property
- Whereas ground-up developments usually involve cases where you’re buying an empty piece of land or knocking down an existing property to build new property