The landscape of development finance has undergone significant changes since the pre-credit-crunch era when banks were the go-to source for developers. With traditional lenders becoming more selective, new players have entered the market, making development finance a complex but versatile sector.
If you’re a developer seeking funding, understanding the variety of available options is crucial. Here, we break down the five primary types of development finance lenders and what they offer:
- High Street Banks
High Street banks were once the primary source of development finance. Today, however, their funding is harder to access:
- Criteria: Often limited to existing customers with a minimum loan amount of £500,000.
- Loan Terms: Up to 60% of development costs at approximately 4% over the base rate.
- Challenges: Highly selective and slow decision-making processes that often result in declined applications.
- Merchant Banks
Historically, merchant banks served as an alternative to High Street banks, but they now fund many projects previously handled by their counterparts.
- Loan Terms: Up to 55% of Gross Development Value (GDV), with interest rates around 7%. Exit fees between 1-2% of GDV are common.
- Criteria: Minimum loan amounts typically start at £500,000. These banks are selective in terms of projects and locations.
- Specialist Development Lenders
These lenders offer greater flexibility and are less stringent about experience and credit status.
- Loan Terms: Up to 75% of all costs, with the possibility of topping up to 90% via Mezzanine financing. Developers often only need to provide 10% of costs.
- Interest Rates: Around 8% annually, with negotiable exit fees.
- Loan Size: Varies depending on the lender.
- Private Companies
Backed by High Net Worth individuals or institutions, private companies provide high levels of funding but at higher costs.
- Loan Terms: Up to 90% of all costs or 70% of GDV.
- Costs: Interest rates are around 12% annually, with a 2% arrangement fee and varying exit fees.
- Growth Area: As deposit rates remain low, these lenders are increasingly popular.
- Private Equity Partners
Private equity investors often engage through Joint Venture (JV) arrangements, sharing financial risk for a portion of the profits.
- Loan Terms: Up to 100% of development costs.
- Criteria: Typically reserved for experienced developers with high-return projects.
The Evolving Development Finance Market
Development finance has grown more complex, with an array of lenders offering tailored solutions. For developers, this variety provides new opportunities but also requires careful navigation. Seeking guidance from experienced commercial finance brokers—especially those accredited by the National Association of Commercial Finance Brokers (NACFB)—is vital for securing the right deal.
Recent Examples of Development Finance Deals
Here are two real-world examples of successful development finance arrangements:
Example 1:
- Loan Amount: £500,000 drawdown facility on £1m GDV.
- Terms: Max loan of 50% purchase price and 100% build costs.
- Rates: 6.99% per annum, no minimum term, no early repayment charges.
- Fees: 2% lender arrangement fee, no exit fees.
Example 2:
- Loan Amount: £1 million drawdown facility on £2.2m GDV.
- Terms: Max loan of 50% purchase price and 50% build costs.
- Rates: 4% over Bank base rate per annum, no minimum term, no early repayment charges.
- Fees: 1.5% lender arrangement fee, 0.75% exit fee (based on loan amount).
Bridging Loans
Bridging loans are also widely available for projects ranging from major conversions to light refurbishments. Funding is typically up to 65% of GDV, providing flexible options for developers.
Need Assistance?
At Clever Mortgages, we partner with NACFB-accredited brokers who offer tailored solutions for development finance. With no charges for placing your enquiry, our network ensures you’ll find the right funding for your project.
Use our contact form to connect with our team today. Let us help you navigate the complexities of development finance and secure the funding you need to succeed.
