What is residential property development finance?

How does property development finance work?

Calculating development finance is a complex business. To maximise profit you need to use your equity efficiently.

Brickflow helps by showing you the loans that not only reduce your borrowing costs, but also enable you to reduce your deposit.

A property development loan is calculated like this:

• The lender lends the lower of a percentage of the GDV and a percentage of the total costs
  
  
• The lender sets a minimum deposit (equity required), whilst also making sure it doesn’t exceed their day 1 leverage limit
  
  
• The loan is broken down into three parts; land loan, finance costs and build loan
  
  
• The lender covers the finance costs first; lender interest (interest is always rolled up) arrangement fees & lender professional fees
  
  
• Next, comes the build loan. Providing the loan is sufficient, 100% of the build costs and contingency will be allocated
  
  
• The residual (leftover) loan is the land loan, and is available to borrow against the land value, providing it respects the day 1 LTV limit and minimum client equity.

How to stretch your equity further

Most borrowers default to a tried and tested senior lender. Deposits vary from 10% to 35% of total costs (including land, build, finance and professional fees), so on a scheme with costs of £3m, the required deposit could range from £300k to £1.05m.

This is an enormous and potentially deal-breaking variance. If you only know one lender who requests a deposit at the higher end, you could end up investing over £700k of your cash unnecessarily, or borrowing it and paying a large profit share. This money could be used to invest in further sites or bigger sites sooner.

It’s the developers who use their equity most efficiently who are normally the most successful, so it’s essential to shop around for your development finance.