How refinancing can save your development project
Lenders offer development finance for projects that require significant capital. Property development projects are resuming their upward trajectory, but the larger implications of COVID and Brexit are still lingering.
Developers are still finding ways to stick to their timelines in terms of project completion and debt repayment. Times like these put the focus back on development finance and the importance of refinancing, in case things don't go as planned.
In this article, we'll discuss development finance, and how refinancing can help developers sail through tough times.
What is development finance?
In a nutshell, development finance is the initial loan that helps you fund one or more projects. The loan usually ranges between 3-24 months and covers everything related to property development—from renovation to building something from the ground up.
Development loans are essential to fill the gap between cash outflow and inflow. In most cases, you won’t see an immediate return on property investment. You’ll need capital to purchase the property, and then wait a year or longer until you see some cash coming in.
The loan amount your project is eligible for depends on the following factors:
- The value of the site
The loan amount will be significantly higher for a high street conversion in comparison to a single-storey cottage construction.
- The build cost
Lenders usually offer 100% of the build cost.
- Gross development value (GDV)
GDV is the final value of the property after the project is complete. The loan to gross development value (LTGDV) is generally 65%, but it's possible to achieve 100% LTGDV with additional security such as the land.
- The track record of the borrower or the developer
Lenders typically offer a one-time disbursement for the cost of the land or property, but disbursements for build cost are phased. Once the project is complete, you can sell the property and close the loan. But what if you can’t sell the property right away? Unexpected delays can become a problem, but there’s an easy solution. Before we get to the solution, let’s talk about factors that can cause an unexpected delay.
What are the issues that can delay projects?
Property development can run into a range of unforeseen situations. But here are the three major ones delaying development in the UK today:
- Bad weather conditions
The UK is not alien to protracted periods of unfavourable weather and this often stresses out the infrastructure along with the schedules.
- Slow construction growth as a result of COVID
COVID disrupted the global supply chain massively in Q3 2021, pushing the growth of the construction industry to the lowest number for 20 years. However, despite improved supply chains in January 2022, the construction industry's growth remains slow, further delaying development projects.
- Delays at the local level
In some cases, local authorities take too long to process applications which ends up changing the schedules. Rising levels of nitrates and phosphates in some parts of the country have also delayed housing plans. Rising nitrates and phosphates can cause issues as house-building processes generally begin with stripping the topsoil as it does not have the ideal physical properties for construction. Nitrogen is naturally present in soil and usually doesn’t pose a risk. However, when the soil is disturbed, excess nitrogen is released, impacting the health of soil and water and damaging affecting biodiversity.
What is refinancing?
When projects get delayed and cause borrowers to dishonor their debt obligations, they incur penalties and stress themselves out. However, refinancing can be a smart, compelling option for borrowers who need to buy some time.
Developer refinancing is the process of lending money to repay another loan. Refinance loan allows developers to finish the last stage and ramp up marketing to sell the property. Before taking a refinance loan, you need to consider the following things:
- Make sure you really need a refinance loan
You should consider refinancing if your repayment is due within 2-3 months and the project has almost finished, you need additional capital for a project you’re working on, or you’re able to get considerably better terms from a different lender.
- Study the costs
Check whether you have to pay hidden charges that can significantly reduce the benefits of refinancing.
- Calculate your benefits
Go through the terms and conditions of your development finance to see how much you can save by refinancing.
- Choose the right broker
Always go with a broker who understands your needs and can get you the best deals.
Why should you look at refinancing to help your development projects?
Project delay is one of the major reasons borrowers consider refinancing, but it's not the only one.
You need access to more capital
A refinance loan is a great way to obtain additional capital when you’ve already used the development loan amount. Essentially, the option to refinance allows developers to flexibly finance their projects without being constrained by the loan amount of their existing loan.
You see potential for saving costs
In some cases, refinancing can save the borrower money, especially if the interest rates have fallen. They also save the borrower penalties that they’d incur by not repaying the original loan. Not completing projects can also come with significant costs, but refinancing can ensure that you’re able to stick to your timeline.
You need more time to repay the loan
Refinancing allows you to push the loan repayment date further. Ideally, you'd sell the property and repay the original loan as planned. However, if you’re experiencing a delay in completing the project, selling the property, or otherwise obtaining cash, refinancing can help repay the original loan. Refinancing will allow you more time while you can get things in order without having to push yourself into a cash crunch.
How we can help you
We focus on finding the right deal for borrowers and property developers. With so much market volatility and rising development cost, we understand how important it is to have a structured development finance strategy.
Interest rates start from as low as 0.44% and we offer up to 100% LTGDV with additional security. You can get a loan amount between £26,000 and £250m and we take an immediate decision in principle. If you're looking for refinancing, we offer up to 75% loan to value (LTV) with the option of 100% funding with additional security.
Development finance and refinance loans vary according to the requirements of the borrowers and the value of the project and there’s no one-size-fits-all plan. To know how we can help you finance your development project, book a call with one of our specialists.