What is development loan?

Development loans are a specifically designed type of loan and finance that allows property developers and investors to get a short term loan to cover the cost of building on land and to get their project off the ground and up and running. Many property developers struggle to get finance or a loan from traditional lenders for this type of project because the risk tends to be higher, but with a higher reward. They tend to be more targeted towards those with experience of the sector and with successful projects that they can demonstrate in order to give loan companies confidence in their abilities. Construction loans are lent on the cost of the build rather than the estimated value of the properties once completed, which is somewhat different to other types of loan where the loan value is calculated based off the current or estimated value of the property. The lenders offering construction loans will often agree quite strict terms around your build schedule and completion dates. They’ll often check throughout the build to ensure that the construction loans they’ve agreed to are on schedule to be completed and, subsequently, the loan is also on schedule to be repaid once the development has been completed.

 

Points to consider

• Rates: In terms of construction loans, rates will vary depending on which construction loan provider you approach, and it will often depend on your circumstances and how well you meet the construction loan criteria too. As an example, if you can demonstrate good property development experience then you may be able to get a better rate of interest than if you hadn’t much construction experience in the past, and similarly the size of the deposit or down payment that you’re able to provide will show the finance provider that you’re able to fund your own project to an extent and believe in yourself. Broadly speaking, a construction loan is interest only, and the interest can either be paid monthly or as a lump sum, but these are terms you can agree with your lender, or things that you can discuss with a broker or one of our advisors.

• Application timelines: For a construction loan, the actual process of obtaining funding for your property development is fairly quick and can be completed within about 72 hours once you’ve been accepted, however, the application process can vary depending on where abouts you are on your development journey, or what your property plans look like. Our team of brokers are experienced and help our clients on a regular basis with planning this type of property development, and can give you a good idea of what level of detail you’re going to need to provide to qualify for a construction loan, as the key is in the detail quite often with this type of construction loan.

• Security: With a construction loan you don’t always have to provide security but it’s certainly preferred by the majority of construction loan providers. Being able to fund some of your own property development displays that you’re serious about the project and aren’t just taking a chance with somebody else’s money. It shows a construction loan provider that you’re willing to risk some of your own money in order to complete your project along with the funding of the provider. How much security you’ll need to provide will depend on you, your situation and the construction loan provider that you choose to go with.