How does a development lender forecast their interest?

  1. The interest for the land loan is easy to calculate; (£ loan amount x interest rate %) x loan term
  2. However, for the build loan, as the borrower is drawing in stages, the lender needs to make an educated estimate. Too much interest, and the loan amount to the borrower reduces unnecessarily. Too little interest cover, and the lender has to ask the borrower for an interest payment part way through the loan, or the loan defaults.
  3. At term sheet stage, most lenders will assume an equal drawdown for each month of the build term; e.g. £ 1m over 10 months would be £100k per month (this is referred to as a straight line drawdown model). This is a conservative model. Lenders like this model, as it should avoid the situation of asking for interest partway through.
  4. The reality is that most borrowers will draw on a S-curve for development finance, which means most of the borrowing occurs at the latter stages (less interest cover required).
  5. All lenders will apply different loan models based on variables such as the location, property type, borrower type, etc. This can be very subjective and can vary according to third party data.
  6. For comparison purposes using the same model across all lenders and all projects, is the only fair way to compare lenders side by side so this is the model our software employs. It’s only when you provide further due diligence and a verified cashflow that the final loan model will be determined by the lender.
  7. For these reasons the results you see on screen for development finance and refurbishment loans, will always differ from the lender’s final loan offer. Getting a DIP will provide you with more accurate loan terms.