7 Ways To Finance Your Property Development Project
07.06.2021 by Jack H
Are you a property developer and need a property finance loan? Or perhaps you’re looking for a mezzanine finance alternative to finish a project?
Navigating the many options to finance development projects can often be a tricky task - there are a lot of factors to consider, including the time needed to complete your application, the provision of income and expenditure evidence, the potential impact on your credit rating, the lack of privacy, and speed of payout to ensure you can complete your objective on time.
Almost every property developer finds themselves in need of property development finance to help them either start or finish their project. No matter whether it’s towards the deposit on a new property acquisition, building your existing property portfolio or you urgently need the funds to finish the build project, our simple guide will allow you to assess what option works for you.
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2. High Street Mortgages
High street mortgages bring lenders from the high street under one roof. These are your everyday basic mortgages that can be found from most banks. With every application, a full credit check with Experian or Equifax (or similar credit referencing agency) will be required to determine loan affordability and suitability. An application’s success is based on both your ability to pay back the loan and the value of the property you are buying.
The two types of mortgage offered are
Residential Mortgages - These are suitable for properties that you are planning to live in while your complete works. They are not suitable for properties that you will be renting out or having been classed as uninhabitable, for example – no kitchen or bathroom.
Buy-to-Let Mortgages – These mortgages are only to be used if you are renting out the property to a non-connected thirty party. Please note, ‘Buy to Let’ mortgages are not regulated by the Financial Conduct Authority. See below for more information on buy-to-let mortgages
Mortgages come in a variety of forms, from those in which you only pay back the interest, to fixed-rate mortgages whereby your interest rate remains at the same level for a set amount of time.
3. Second Charge Mortgages
Some homeowners may not be allowed to re-mortgage to free up the equity within their property due fixed-term interest restrictions and excessive penalties for re-financing.
In this case, instead of re-mortgaging to free up funds to improve or add value to a property, you can opt to take a second charge mortgage to release the equity within your home.
Equity is the percentage of your property owned outright by you, which is the value of the home minus any mortgage owed on it.
A second charge mortgage allows you to access the equity with your home and release it in the form of a new standalone loan from your current mortgage. A second charge mortgage is a top-up to your current loan either with your exciting lender or in many cases a brand-new lender. A second charge mortgage means you will have two mortgages on your home.
Obtaining a second charge mortgage opens the borrower up to a new panel of lenders with a broader range of interest rates and acceptance criteria. These mortgages are perfect for self-employed, small business owners and more diverse customer profiles.
4. Commercial Mortgages
A commercial mortgage is much like a high street mortgage, except the property against which the loan is secured must be classed as commercial. A commercial mortgage is a mortgage loan secured on a commercial property, such as shops, offices, warehouses, large residential buildings and shopping centres. The proceeds from a commercial mortgage are typically used to acquire, refinance, or redevelop commercial property.
When applying for a commercial mortgage, the lenders will require a lot more information in order to make a lending decision. A business plan, with detailed income and expenditure, will therefore be required.
With commercial mortgages, the lender is more likely to look at your business’ income and assets and use these to assess your ability to pay.
5. Buy-To-Let Mortgages
If you are interested in building a property portfolio, you may well be considering buying a property to rent to earn an income. If so, you will need a buy-to-let mortgage.
A buy to let mortgage is an unregulated mortgage designed especially for the purpose of renting out a property. This product can not therefore be used for owner-occupiers.
Unlike a residential mortgage from a high street lender, the interest rates are slightly higher, a larger deposit is needed and there are some additional fees. You will also have to pay more stamp duty for a second property that is not your main home.
Some buy to let investors choose to set themselves up as limited companies for taxation purposes.
When applying for a buy to let mortgage, the borrower also needs to make sure that their proposed rental income not only covers the mortgage repayments, but also the additional costs such as maintenance and voids.
Most buy-to-let mortgages are mainly offered on an interest-only basis. The banks will use a rental stress calculation to ensure the rental received must cover the cost of the interest on the mortgage and a period of rental voids. If the borrower chooses an interest-only option vs a repayment option, they must ensure they have an adequate loan repayment vehicle in place as the amount borrowed is not being repaid.
At the end of the term if the debt is not repaid, the borrower may have to sell the property of re-finance to prepay the debt
6. Residential Bridging Loans
Residential bridging loans are short term loans that are interest-only and can be organized and paid out very quickly with relatively short notice. These products are often used by property developers as they are adaptable for several situations in which a high street mortgage would not be suitable.
These bridging loans are perfect for buying and selling properties, auction property deposits or auction purchases and refurbishment work and are used to help bridge the gap between two more mainstream types of lending.
As part of the application process, the bank will consider the size of the deposit, the current property value, the proposed increased value, and the cost of works. Fundamentally, the bank wants to understand your financial commitment to the project and your ability to pay the loan back – or your ‘exit strategy'.
7. Commercial Bridging Loans
Almost identical to residential bridging loans, commercial bridging loans are used to bridge a funding gap when buying or renovating a commercial property.
In order to qualify for a commercial bridging loan, the property must have at least 40% commercial usage, e.g. a shop and upper parts (i.e. flats).
They can also be used to help fund the expansion of a small business by buying new premises.
When looking at property finance options, take the time to consider what type of property development finance meets your objectives in terms of capital raising, provision of income, expediter, credit reports and timescale.
If you want to consider a traditional property finance alternative, then look at PawnYourCar.co.uk and consider pawning your prestige or classic car to complete that upcoming project or the mezzanine finance alternative you need quickly.
With same day loans from £1,000 to £250,000 no credit check required, and discretion guaranteed, application can be completed and paid out the same day to the property developer when they need the cash quickly.