What is residential property development finance?
Residential development finance is a short-term loan used to fund the construction, conversion or refurbishment of residential buildings
Here’s everything you need to know if you or your client are looking to secure a property loan for a residential development.
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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.
What is the capital stack?
The capital stack is the structure of your loan that is made up of different layers; typically 1st charge loan, 2nd charge loan and equity.
These are also known as; senior debt, mezzanine debt and deposit.
Finding the best capital stack for your project allows you to minimise your deposit and maximise your profits.
Where a lender or investor sits in your stack will determine their risk and therefore their lending cost to you.
Debts are repaid from the bottom up, so the senior loan will be paid first. The higher up the stack the lender, the bigger the risk they incur and the more expensive the debt becomes.
To understand more about cracking the capital stack, head over to our blog.
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.
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Why use Brickflow for your next property development loan?
Brickflow searches the breadth of the development finance market, so you don't have to. We search the big banks, challenger banks and specialist development lenders to ensure you find the loan that best meets your requirements, every time.
Compare development finance options for your residential or commercial property project, and choose the loan that maximises your equity, and allows you to grow faster and scale your business sooner.
Search and apply online, receiving results in minutes not months. We publish in-depth lender criteria that you won't find anywhere else, so you can check your eligibility before you start the application process.