If you’re a property developer, investor, or landlord, there’s a range of finance available to help you kick-start your next project. But even for experienced developers, the alternative lending market can feel large and complex — on this page we’ll run through some of the things to think about, so you can make the right property development finance choices.Get property development finance
If you’re looking to kickstart a large-scale property development project or want to renovate a buy-to-let property, you might be exploring your property finance options.
Although property finance can be complex for even the most experienced of property developers, don’t panic: our guide should help clarify a few things.
Property development finance is a type of business finance used for the purpose of funding a residential, commercial or mix-use property development. It's a fairly broad category that covers term loans, mortgages, bridging loans and even personal loans. It refers to the large-scale funding of significant building or renovation works.
You might use it to fund a new residential housing project, workspace development or regeneration initiative. Development finance is likely the most appropriate form of property finance for ground-up developments, such as building a property from scratch.
If you want to invest in a private residential property but don't have the immediate funds available, private property finance can help. Both private individuals and residential property developers can apply, as can property companies and building firms.
Eligibility criteria varies: some lenders will expect a detailed business plan whereas others will focus more intently on your credit score. Among other factors, having a well-thought-out investment strategy in place when you approach a lender can help you get a good rate.
If you're looking to take out property development finance for the first time, there are a few things to consider. Firstly, you should work out which property development finance option is most relevant to your circumstances.
For instance, if you want to borrow money to buy a property to rent out, you'll require a buy-to-let mortgage.
A bridging loan, on the other hand, might be suitable if you want to buy a new home but haven't sold your existing one, or if you want to purchase a property and renovate it (paying the full loan amount and interest upon the subsequent sale of the property).
Before committing to a property development project, conduct research into the local market you're looking to purchase in. You might be considering setting up a limited company - if so, you should seek professional tax and legal advice.
Ground-up property development finance is designed for larger projects and covers the price of the land and part of the construction cost. Property development finance is usually around 70-80% of the build cost. The developer must source funding for the remainder.
For short-term refurbishment projects, a bridge loan could be the most suitable type of business finance to opt for. Bridging loans are designed for the short-term until the loan can be paid back or a longer-term type of finance is secured.
Large renovations, on the other hand, could be funded using longer-term bridging finance or a commercial mortgage.
The term ‘property finance’ (without the ‘development’) is a catch-all term that applies to a variety of finance options relating to the property sector. Bridging loans, development finance, commercial mortgages and auction finance are all types of property finance.
Take a look at the different building development loans available and what they’re used for. Once you’re ready to apply, see your funding options.
If you'd like further clarification on what type of property finance would suit your circumstances, feel free to get in touch with the Funding Options team at firstname.lastname@example.org.
Commercial mortgages can be used to purchase commercial property like shops, offices and warehouses — almost anything that isn’t private residential property. Broadly speaking, they work the same way as private mortgages, helping you spread the cost of a large purchase over time (generally a number of years).
The most straightforward commercial mortgages are taken out by existing businesses who want to buy their own premises, where the business already operates. A typical example could be a dentist who wants to buy the building where she practices — instead of paying large amounts of rent, she would prefer to own the property, but can’t afford to pay for it outright.
If you don’t want to contribute cash yourself, it’s sometimes possible to secure 100% of the finance using additional security — but you’ll need to have favourable circumstances, like a solid trading record and a history of operating from the same premises. While it's easier to secure a commercial mortgage as an existing business, it's possible to get one for a startup too — although it’s more challenging because there's more risk for the lender.
Another situation where a commercial mortgage might be suitable is when a landlord with a large property portfolio wants to buy more properties — by combining multiple properties into one mortgage, it’s possible to cut arrangement fees and take advantage of economies of scale, as well as having one point of contact with one provider.
Where this type of commercial mortgage differs from a buy-to-let mortgage is scale. Generally it’s a setup that would be reserved for a full-time landlord with multiple properties, and wouldn’t be appropriate for a private individual acquiring their first rental property.
Auctions can be a quick way to get a property at a discounted price, and there are lenders who specialise in auction finance. Once you’ve made the winning bid, auction houses usually require the funds within 28 days, which means you have to move fast to secure funding.
Finding a lender who specialises in auction finance means you can get the money much quicker than the norm, so it’s the best route to take if you’re thinking about property auctions. It’s sometimes even possible to get the cash within a week.
There are also lenders who’ll give you finance before you attend an auction, so you can arrive prepared with an 'agreement in principle' — this type of arrangement can be particularly useful for experienced and established developers. But even in more challenging cases where finance isn’t in place, it’s occasionally possible to get funding for enthusiastic first-timers who have bought property at auction with only enough to cover the deposit!
The next type of funding within property is bridging or development finance. This can mean any short-term funding that helps pay for building and development costs. These two terms have significant overlap, and might seem interchangeable, but there are differences between the two. The main thing that determines if you need bridging finance or development finance is how ‘heavy’ the project will be.
Second charge loans, or second charge mortgages, act as a secure loan allowing you to use equity from your commercial property as security against another loan. As they're another mortgage, your business will be required to pay off the first mortgage repayments before paying back the second charge loan which can mean they take longer to clear.
Many businesses choose to take out a second charge loan on commercial buildings as they can be used to help release equity using property or land, to help grow the business. A second charge loan or mortgage is a great finance option for business owners who already own property including a home.
This is the most important question to ask before you explore your finance options for refurbishment or renovation. To determine what type of finance you need, it’s useful to think of projects in three broad categories:
This is the most straightforward type of project, where in general the main changes are aesthetic rather than structural, but may involve some internal work on floors, ceilings and walls.
As well as aesthetic changes, this could require moving internal walls, plumbing, or electrics, adding rooms and external walls, or even partial demolition and rebuilding.
The most involved type of property project, starting with an empty plot of land, or a very heavy refurbishment/conversion (for example, when nothing remains but stonework).
The terminology in property development isn’t rigorously defined, so what some people consider a ‘light refurb’ could be considered heavy by others — and somewhat confusingly, all of the above are types of ‘development’.
Depending on the type of project you want to embark on, there’s a world of finance options available. You might want a 'refurbishment bridge', which funds 3–24 months of building costs and sometimes comes with the option to convert into a mortgage later on. This type of product would cover the majority of light and heavy refurbs.
Then for more extensive projects and ground-up developments, you can find 'development finance' to cover both land purchase and building costs. For example, if a developer wants to buy a plot of land for £100,000 and spend another £500,000 building properties on it, a lender might finance 50% of the plot purchase and 70% of the build.
In this example that would mean the developer would only need £200,000 of their own money, rather than the total of £600,000 that the whole project costs — freeing up their personal capital for other projects, or unexpected expenses.
Experienced developers who act as landlords can also use property they already own to secure lending. With enough equity free in your portfolio, you can get finance to buy more properties — allowing you to grow your property portfolio without having liquid cash.
Property developers can bolster their chances of being able to raise finance in many ways. Getting planning permission (if required) is just one important step to make. Bear in mind that a robust application will also set you on a positive footing - fill in documents carefully.
Many property developers hold down a full-time job when starting out to guarantee regular income. You'll need to work out what type of property developer you want to be, e.g. commercial or residential, ground up or light refurbishments.
You should also spend some time exploring opportunities and exit strategies, and learn how to leverage property development finance.
Yes - if you've got the right exit strategy in place and the lender deems you eligible, you can get a loan for property development.
The type of loan you get will depend on what you need the funds for. Auction finance, for instance can help you to get a discounted property at auction. Our Finance Experts can help you identify the right type of finance when you enquire.
As you can see, property development is a complex area, especially when it comes to finance. Ultimately, the best first step to take when determining what type of finance you need is to assess how extensive the project is, how long it will take, and how much it is likely to cost — in both the best- and worst-case scenario.
All successful property developers are good planners, and getting the right finance in place is a crucial ingredient in development success — whether you’re buying your company’s premises, or growing your rental portfolio.
Asset Lending & Property Team Lead
Vivek Seda is the Asset Based Lending & Property Team Lead at Funding Options. Vivek has been in the commercial finance industry for over five years, helping SMEs in the UK access over £40m of funding in that time. He also supports the business on working on corporate finance and structured transactions successfully funding Acquisitions and MBOs for businesses.
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