Development Finance

What are the different types of development finance?

Alternative lending isn’t the easiest subject to follow; even experienced developers often find it difficult choosing the right type of finance for large-scale projects. There are a few different property development finance options and here’s what you need to know about each of them.

Commercial mortgages

Commercial mortgages are used for buildings that are not residential. As the name suggests they are for commercial ventures such as shops and offices. It’s unlikely that anyone who runs a business will have the profits to pay for a building outright, so this option allows them to pay for the property over a number of years, just like a private mortgage on a home. But unlike private mortgages, lenders are more likely to review your business’s income and profits rather than your personal income when making their decision on your ability to pay.

It is most common for businesses owners who have been operating in a building for a long time to take out a commercial property mortgage once they decide to become the property owner. For example, a butcher running a family business might decide to buy the property, giving them more financial security. Opting for a loan to cover the majority of the cost ensures they can continue trading as usual and pay the mortgage as they would pay their rent every month.

In this example, the butcher could potentially apply for a 100% commercial property development mortgage, meaning they would not have to put any funds towards the property initially. To obtain this kind of finance, a business would need to have an exemplary record and a long trading history from that premises. This is because there is more risk involved for lenders if they don’t receive any deposit.

Similarly, it can be difficult for new businesses to gain commercial mortgages as they have not built up a level of trust or proven that their business is successful. That can make lenders more reluctant to set up an agreement. If this is the case, a detailed future business plan may be required when applying.

Buy-to-let mortgages

If you’re buying single a property that you intend to rent out, you’ll need to opt for a buy-to-let mortgage. These mortgages can be slightly harder to obtain, and there are often more conditions that must be met before an agreement is granted. If your income is under £25,000 a year, you already own a property, you are over a certain age or your credit score is less than stellar, you might find it difficult to get a buy-to-let mortgage.

Buy-to-let mortgages typically have higher interest rates and require a larger deposit (usually 25%) to secure. Bear in mind that lenders usually require the rental income to be 25-30% higher than your mortgage repayments, so you should estimate this vs. the mortgage value when you buy the property.

If you’re a full-time landlord with a range of properties, choosing a commercial mortgage can save a lot on fees and interest rates. Combining multiple properties into one larger mortgage cuts on arrangement fees and keeps all your business under one provider, making it easier for you to track.

Auction finance

Finding a mortgage for auction property investments can be tricky, but certainly not impossible. You can bag a serious bargain at a property auction, but most people can’t expect to pay the amount in full, even at a discounted price. And, with most auction houses needing payments within 28 days, the race is on to find funding within that time.

Getting a mortgage for an auction property is quite straightforward if you approach a reputable lender. If you’re thinking of buying a property at auction it’s important to apply for funding with a lender that offers a quick decision or an agreement in principle (like us!).

Having an agreement in principle will show the auction house that you have the means to pay for your property should you win the bid. Both novice house-buyers and professional developers can apply for auction finance, so this could be the perfect option if you want to get yourself a ‘fixer upper’.

Bridging finance

Bridging loans are used as a short-term finance solution for property developers needing to ‘bridge’ the gap between buying a property and selling it. It’s also another funding option for those who buy a property at auction and can’t secure a mortgage agreement within the allotted time. Lenders usually offer bridging loans with terms between 1-18 months and you will need to repay the loan in full at the end of the term.

In property development, bridging loans are most commonly used for property renovation, with developers able to carry out any building work, complete and sell the property before the term is up. This ensures the loan can be repaid in full and that developers can begin work without delay once the property is obtained.

As with most short-term loans, bridging loans are more expensive than traditional mortgages. Failure to repay the full amount of the loan when the term ends can lead to repossession and added costs. So, you must ensure you have the means to repay when taking out a bridging finance agreement.