Property development is big business. It’s an industry with the promise of high profits, but you often need a big pot of money to get started. That’s why there are lots of finance options out there for the sector, including property development loans, which can support your projects.

Our guide to property development loans outlines how they work, the key features and benefits and the alternative finance solutions to consider.

What is a property development loan?

A property development loan is a type of short-term business loan used specifically for construction and development purposes. Funds are paid out in stages throughout the construction process, normally once key parts of the project have been completed.

When sourcing property development loans, you may be able to get a larger sum of money than with some other finance options, while the structure of the loans is ideal for the staggered nature of development projects.

‍

How does a property development loan work?

As property development loans are specifically for real estate projects, funds are typically released in stages, tied to different construction milestones. This helps ensure funds are used properly, while also aligning with typical construction project payment schedules to minimise cash flow problems. This differs from standard business loans, where the full amount is provided upfront. 

Property development loan terms usually range from 12 to 36 months, depending on the size and complexity of your project. The usual repayment structure is designed for the typical lifecycle and financial needs and challenges of construction/development projects. So, in most cases, the flow will be as follows:

• Make interest-only payments* during the construction phase (either monthly or rolled up to be paid at the end).
• Repay the loan principal amount upon completion, either after the sale of the property or by refinancing it into a longer-term finance option, such as a commercial mortgage or investment loan.

*Interest is usually charged only on the amount drawn.

Property development loans are typically secured against the property being developed, meaning the lender has the right to repossess and sell the property if you default on repayments or fail to meet the loan terms.

‍

Key features of property development loans

Here is a summary of the key features to be aware of when considering using a property development loan

• Staged release of funds – initially, an advance can be made against the value of the site, to be used to purchase the site or get construction underway, then the remaining funds are released in stages, based on development milestones.
• Offers based on gross development value (GDV) – most lenders will offer an amount based on the GDV, usually between 60-70%.
• Flexible repayments – the principal is normally repaid after development is completed, while interest is paid monthly or rolled up to pay at the end of the project.
• Lending term length – usually between 12-24 months, or as much as 36 months, but often tied to your likely project timeline and exit strategy.

‍

Property development loan rates and costs

Interest rates for property development loans are usually between 6 and 12% annually, with the rate you get based on various factors, such as your credit history, risk level and GDV. You may have the option of variable or fixed rates, plus the flexibility to choose to pay the interest monthly or add it to the total loan balance, to be repaid in full after selling or refinancing the property.

Other property development loan costs to consider are arrangement and exit fees (both usually around 1-2%), valuations, surveys and legal costs. Also, if you use a broker to find a suitable loan, they will usually charge between 0.5% to 2% of the loan’s value.

{{business-funding-on-your-terms="/components"}}

‍

Who are property development loans for?

Property development loans are for experienced developers and builders to help cover the costs of various residential and commercial projects, from houses and shops to offices and industrial buildings.

The majority of people applying for property development loans will be:

• Experienced developers who’ve been working in property for years and can show lenders their past experience and track record.
• Professional builders who’ve purchased land to build houses to sell.

Property finance lenders will always prefer applicants who already have a background in development projects. So, if you’re a first-time developer, you may need to work a little harder to show that you know your project inside out and that you can manage costs efficiently.

‍

What are the main property development costs to finance?

Property development is complicated, and construction projects come with many different costs (some mandatory and others that reveal themselves during the process). 

Here are the main property development costs that loans can help to cover:

• Planning and design costs to pay architects, engineers, consultants and project managers.
• Land acquisition (the purchase price to be paid for the site or existing property).
• Construction costs, including materials, labour and staffing/contractor expenses.
• Professional services, such as legal fees, valuations and surveying costs.
• Utilities (water, electricity and gas, and other such costs)
• Marketing and sales for the property, including costs of using various platforms and paying estate agents.

Loans can help to cover some of these costs at different stages of your development project and sales journey. However, remember to consider the cost of the loan itself. Also, put aside a reserve fund for any unexpected costs, due to delays, market conditions or additional budgetary needs. 

‍

Benefits of property development loans

When it comes to financing a property development project, there is no one-size-fits-all solution. That means it’s really important to weigh up the benefits and costs involved before taking out any kind of finance.

Here are the key benefits of using property development loans to think about:

• Quick access to funds: Getting finance from high street banks for development projects can be tricky and a lengthy process, whereas most dedicated development finance lenders can often give you much faster approvals and access to funds when you need them.
• Cash flow management: As money is drawn down in line with project milestones, and loan repayment is deferred until the end of the project (either post-sale or when entering refinancing agreements), you can better manage cash flow and cover costs at the right times.
• Cost efficiencies: While development loans are short-term funding solutions, only paying interest on funds drawn down at each stage saves you from incurring unnecessary costs.
• Ability to take on more and larger projects: Development loans allow you to take on much larger projects than would otherwise be possible, and better cash flow management also makes it possible to balance multiple projects at once.

Choosing property development loan providers

When choosing between different property development loan providers and their finance offerings, you should keep the following considerations top of mind:

• Speed of funding
• Level of flexibility and exit options
• Loan draw-down and repayment terms and structure
• Loan to GDV ratios
• Interest rates offered
• Total cost of borrowing
• Lender experience, track record and reputation in the market
• Transparency of fees – look out for hidden costs
• Support and expertise offered 

Popular providers in the UK include Paragon Bank, Shawbrook, Octopus Capital and United Trust Bank. However, you can explore various high street banks and private lenders to see what property loans and finance solutions they provide and the terms they may offer to judge the most suitable option for your project and funding needs. 

‍

What property loan providers will look for when assessing your application

• The current value of the property or site.
• The predicted value of the property after development completion (the Gross Development Value).
• A clear project plan and detailed breakdown of construction and renovation costs.
• The project timeline with key milestones outlined.
• A property portfolio and details of your development experience. 
• Planning permission and building regulations.
• Your exit strategy.
• Various finance statements and projections.
• Your credit history and existing finance facilities. 

What other finance options are open to property developers?

Property development loans are just one of several funding solutions for developers, builders and construction firms.

Here are a few other property finance options to consider:

• Commercial mortgages: Long-term finance agreements to spread the cost of large-scale property purchases.
• Auction finance: specialist short-term business loans for purchasing properties and securing development opportunities at auctions within the required deadline.
• Bridging finance: Funding solutions to bridge gaps in capital required to complete a property purchase or high-value acquisition at pace.
• Mezzanine finance: A mixture of debt and equity finance options to reach the necessary funding goals for property purchases and development project costs.

Another option to consider is a flexible business loan from a digital lender like iwoca. Why? Although not property-specific, the speed and flexibility of funding means you can access the funds you need to proceed with development projects, cover the various costs and align repayments with your cash flow.

With iwoca Flexi-Loans, you can borrow between £1,000 and £1 million for a few weeks or up to 60 months, depending on your project needs and timelines, and you only pay interest on what you draw down.

Apply for a loan from iwoca online in minutes, with funding decisions provided within 24 hours and funds often available on the same day. Also, you can repay the loan early, free of charge, to avoid unnecessary interest costs. 

‍