Whether you're a first-time developer or a seasoned pro, financing your property development or investment project can seem complex. With so many property finance options available, it can be hard to know which one is best. Costs vary, depending on the type of financing you choose, so it’s vital to find the best option for your needs.
What are the different property finance options?
Let's explore the most common finance options for property development and investment so you can decide which is right for you.
Development Finance
This is short-term finance which can be used to construct new buildings, and the drawdown of finance is often staged in line with the development of the property or project. The loan is secured against the property being developed, which means that the lender has a stake in the project. They’ll also charge fees and interest on the loan.
For any development project, particularly ground-up development, you need to work out the extent, timeline, and cost of your project. This will enable development finance professionals to properly structure your finance which is always crucial in any development project.
Buy-to-let mortgage
Are you looking to purchase properties to rent them out? If so, a buy-to-let mortgage could be the ideal long-term financing option. It will give you the capital you need to purchase and improve a property without having to sell the property to repay the loan. Developers can use the cash flow from their buy-to-let properties to finance the construction of new buildings and renovate existing properties.
Buy-to-let mortgages typically have lower interest rates than other types of loans, making them an attractive option for developers looking to maximise their profits.
Commercial mortgage
Property investors working on commercial buildings rather than residential properties can take out a commercial mortgage for investment purposes. Similar to high street mortgages, commercial mortgages are secured against the building in question. However, this time, the property will be a shop, factory, office, or other commercial building. It may include some residential accommodation, putting it into a semi-commercial category.
Any lender will be interested in who your tenant is, or will be, in the property,. Another key aspect to be reviewed will be the lease and rental arrangements with your tenant – expect to share the formal lease contract with your selected lender.
Because a commercial mortgage is secured against a property, they usually come with better interest rates than conventional business loans.
Bridging loans
Bridging loans can be used for both commercial and residential property projects. These involve short-term lending to facilitate property purchase, refurbishment or cover costs towards the end of a project. Many property developers use them to ‘bridge the gap’ between other forms of lending. For instance, you may take out a bridging loan whilst waiting for the completion of a mortgage application or to exit development finance pending the sale of the completed properties.
If you’re planning to rent out your properties, you may also want to consider a buy-to-let bridging loan, specifically tailored for this purpose.
The key to either of these options is knowing what refurbishment will be undertaken as lenders have different products for light and heavy refurbishment.
Auction finance
You can often find cheap properties at auction but must have full capital to buy a building this way. Some lenders specialise in offering finance for property purchases at auction. The key here is speed to accessing the finance as you may have as little as 28 days to complete the purchase. Also, make sure your solicitor will have the capacity to complete in the allotted timeframe!
Pension lending
Those with a self-invested personal pension (SIPP) or a small, self-administered scheme (SSAS), may wish to apply for property-backed, pension-linked borrowing. This structured finance solution enables you to purchase a commercial property through a pension scheme. As you would expect, there is much legislation associated with this type of lending and not all lenders offer this product.
Long-term financing advice from Funding Round
When exploring your financing options for property development and investment, you need to work out the extent, timeline, and cost of your project. The key to any successful development project is how it is structured. We can then help you find the best type of short or long-term financing for your needs, plus the optimum structure for you to maximise your return.
As an independent finance broker, we offer a personalised service to help property developers make an informed decision on the most appropriate financial solutions. For more advice, contact Funding Round today.