Top 7 Property Development Finance Myths Busted
Much like any industry, there are certain assumptions and beliefs around what property development finance is and how it can be used. In this post, we will bust some common misconceptions and set the record straight on development finance, allowing you to make an informed decision in this rapidly changing environment. But, before we get into the myths, we would like to define the term property development finance and who is it for.
Property development finance is a type of commercial loan that is used for funding a residential, commercial or mixed-use property development. This type of loan is particularly used by experienced property developers to undertake large building or renovation projects, such as a new residential building project, workspace development or expansion, buy-to-let property renovation or land purchase.
1 There aren’t many good lenders available
Many people think that there are only banks and a handful of development finance lenders in London. That is mainly because they have been recommended by their architect or accountant or they appear higher in Google. So, it is common for developers to give up looking after trying a few options, either by getting declined or by getting higher interest rates.
However, the truth is there are plenty of decent lenders available out there in the development finance space. Their offerings can vary based on their target market and the borrower’s profile. If you are not sure, it is recommended using a reputable financial advisor who can help you go through the options.
2 You need a high credit rating to be approved
Although a good credit rating is a must, but poor credit history isn’t a problem, provided it is for the right reasons. For instance, if you have faced bankruptcy in 2007-8, then most lenders are flexible and will consider your application because there was nothing developers could do to stop it. However, if bankruptcy is the result of excessive trading or any criminal activity, then you are very less likely to find a good lender.
More than your credit history, lenders are interested in learning about your property development plan and how you plan to repay the loan. So, if you convince the lender that the loan will be repaid in the determined timeframe, you have more chances of approval. Another way to increase the chances of approval is to inform about your credit issues upfront to the lender. This will demonstrate your honesty, and increases your chances of obtaining development finance, despite an imperfect credit score.
3 You cannot get development finance if you do not have any cash to put in
Although it is preferable to put some cash in, you don’t necessarily need cash in order to qualify for the property development loan. There are many avenues that can offer 100% funding for your project against the value of the predicted property. Even if you haven’t got 15 or 20% of project costs to put in, this kind of finance is a feasible option.
100% funders are useful for developers that have zero funds or their funds are tied up in other projects. This way developers can avoid missing out opportunities and potential profits that would otherwise pass them by.
4 It takes too much time for the approval
Many people believe that all loans are similar and take too much time for the approval. However, the truth is, unlike standard bank loans and commercial mortgages that take months for approval, development finances can be arranged much more quickly.
When time is crucial, the broker can work with the lender to make sure the funds are available within a few weeks. The process becomes even quicker when you have all the required documents in place and have a clean credit history.
5 It is complicated and stressful
Development finance is often perceived as stressful, complicated and high-risk loan. Part of what makes people think that way is its unfamiliarity, especially when they haven’t heard of this type of finance. However, the truth is development finance is becoming a more common funding solution than before.
Development finance has evolved considerably over the past few years and the number of lenders are also growing who are willing to offer development finance. They can be used for a range of purposes pertaining to property development. If you are unfamiliar with the process, they are specialist financial advisors available who can help you go through the process smoothly.
6 Development finance is expensive
A few years ago, development finance was thought to be expensive compared to other types of loan. That was because of the high level of risk involved in the days when it was considered a last option, leading to higher interest rates and fees. However, lenders today have become increasingly competitive in their rates.
Development finance can be arranged from as low as 4.5% to around 7.5% per month. But, as they have gained popularity, the finance market has become increasingly competitive, and cost of standard development finance has fallen.
7 The cheapest lender is the one that offers the cheapest interest rate and fee structure
In the current market situation, just looking at the interest rate and fee structure is not enough in determining the cheapest lender. In fact, the lenders with the same interest rates can also impact the final repayable amount.
The interest rate can be applied in different ways, which results in different level of interest. You can consult multiple lenders with the same interest rate, but in reality, the interest amount is different for all of them because they apply interest in different ways. As a result, the interest rate alone cannot be used as a decisive point.
Now that we have busted some common myths about development bridging finance in London, you will have more knowledge on how to make more critical decisions about your next property development project. While there are a number of misconceptions lingering around, the truth is that development finance is a powerful way for property developers to save on development costs and grab the best opportunities.