If you’re trying to finance a property development, there are several options available to you including cash, the sale of another property and a loan. Property development loans are becoming an increasingly popular short-term lending solution for a range of residential and commercial development projects. But what are property development loans and what are the pros and cons of getting one? In this guide, we’re going to find out.
What are property development loans?
Property development loans are just that, a loan that’s specifically for the purpose of property development. Whether it’s adding an extension to an existing home, developing a plot of land, or constructing commercial premises. What’s more, development finance often comes in two parts. The first can be used to purchase land with planning for development. The second part is then used to finance the construction of the property.
For more information, head over to our in-depth property development loan guide.
Property development loans: Pros and Cons
Like any financial service, there are pros and cons to development loans, and they may not be for everyone. But for those in the right circumstance, they can be an excellent tool in your property development toolbox. First, let’s look at the advantages of taking a development loan to finance your next project.
The advantages of development loans
The pros of development finance include:
- Access to large amounts of money. Typically, development loans offer you access to the largest amount of money on the UK property market. This allows you to completely fund your projects at every stage of the process from planning to construction. It also allows you to take on projects with higher potential ROI.
- Speed. Property development moves fast, and the success or failure of a project can often be decided in weeks or even days. Property development loans can be applied for and granted in a short amount of time, giving you access to the funds you need to ensure that your project stays on track
- Interest is only charged on the funds released. As the funds for the project are often released in stages, interest is only accrued on the money you’ve received, rather than the total loan value. This can reduce the total amount of money to be repaid, saving you in the long run.
- Property development loans are often secured against the potential value of the property itself, rather than your income or personal finances, which means that they are often more accessible than a traditional mortgage.
- Depending on your agreement, you may not have to pay any of the loan back until the project is completed and sold. This means no monthly repayments (the interest is added to the loan) and the funds are available to pay for materials and labour.
The disadvantages of development loans
The disadvantages of development loans include:
- Complexity. Development loans can be quite complex and lenders need to see a lot of information and documentation. They may also stipulate in-person site visits. Although this may seem daunting to some borrowers, especially those new to property development, a good broker and lender should make clear what’s required, provide guidance during the process, and help reduce stress.
- It’s also commonplace for the lender to visit the site throughout the process to monitor progress and approve the release of the next stage(s) of funding. This will also be attended by their surveyor.
- Interest rates for development loans are often higher than other forms of borrowing. The speed of delivery, lack of monthly repayments and size of the loan means that the lender will charge more. The complexity of the process also often means that overall fees are higher.
- If there are any delays or issues with the project that prevent it from being completed, or at a value lower than expected, you will still have to repay the full amount of the loan as well as interest and fees. This potentially leaves you exposed to changes in the property market.
At Hunter Finance, we have a proven track record of providing property development loans for many satisfied clients across the South East. To discuss your development finance options for your upcoming project, don’t hesitate to contact us!
