So you need to borrow money for a property project – what are the key considerations you (or your broker) need when choosing the sort of finance you need?
Q1. How long do you plan to own the property for:
- If under 18 months, you will need bridging or development finance (cost 8-12%+ pa). An example of a bridging finance provider would be Regentsmead, Hope Capital or our firm, Avamore.
- If over 18 months you should consider a “term lender” who can borrow from wholesale markets and will likely cost 3-4% pa. Examples of a term lender are RBS, Lloyds and Handelsbanken.
- If the property is a buy-to-let property the market among lenders for these types of lending products is highly competitive and there are some really great deals out there. Please get in touch and we can refer you to a broker with the best BTL deals.
- If after 3/4+ years you wish to carry out a redevelopment of the property you can then look at development funding options. It would be too far in the future to consider these in advance.
Q2. Do you intend to carry out development works?
If the answer is yes, there is a follow-up question – how long will those development works take and how substantial are they?
If the works are more refurbishment or conversion works, your requirement is better suited to a refurbishment bridge as there may not be sufficient duration to the loan to attract a development lender.
However if your works involve a new build element and are more substantial in their nature, a development lender may be more suitable.
Q3. Are you looking for maximum leverage or can you fund a lot of the project with your own cash?
- If you have a lot of your own capital and could fund 35-40% of the total project costs on your own, then it will be substantially cheaper borrowing from RBS, Lloyds or Santander.
- If you can fund 25-30% of the project costs on a residential development then you could borrow from Close Brothers, UTB, Aldermore, Secure Trust Bank or Investec.
- Finally, If you cannot fund more than 10-20% of the project then you will have to speak to Titlestone, Zorin, Alpha and Aeriance or of course our firm, Avamore.
- Alternatively you can borrow up to 90% of costs by using a high street bank in conjunction with a mezzanine lender or an equity provider such as Crowdlords or Cogress
Q4. Do you intend to retain the finished residential properties after the works are completed?
If yes, there are limited facilities for developers called “build to let” but in the majority of circumstances, despite the added fees, it is probably cheaper to refinance on completion of the facility.
Q5. Do you want to sell the properties when finished but need to release some cash from the development when practically completed?
If so then the best option here is probably bridging finance because it is relatively flexible and will allow the borrower to maximise the amount of capital released whilst not committing the borrower to borrow for the long term.
Q6. Do you intend to redevelop the property but you need to get planning first?
There are some limited offers in the market from lenders who will lend against land without planning and roll that development into a development facility. However, in the majority of cases it is better and more flexible for a borrower to bridge against the unconsented land and then refinance with a cheaper development funder once the planning is granted.
Q7. Do you plan to live in the property when the development or refurbishment is finished?
This is a regulated product and many lenders, including our firm, Avamore, cannot lend to people who intend to live in the property that they wish to borrow against. You will need a regulated product – ask us for a referral to a specialist regulated broker.
Q8. Do you need to complete the purchase quickly but the bank can’t do their paperwork in time to get you the money when you need it (e.g. at an auction)?
This is perfect for bridging loans. You can borrow from a bridging lender from as little as 1-2 months until your High St lender steps in.
That sums up around 8 common scenarios to be considered in property finance. If there is a scenario we have not suggested but which you would like us to mention or consider, please do set this out in the comments or email firstname.lastname@example.org