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Finance, Property, Property development

Property development finance options

Whether you’re looking to begin a large-scale property development project or plan to expand your buy-to-let property portfolio, you’ll probably need property finance to realise your ambitions.

Property development finance funds residential, commercial or mixed-use property development. Several options are available, and as the choice can be overwhelming, here’s an outline of some possibilities.

Five property development finance options

1. Development finance

Development finance is used for property renovation projects or constructing new builds. Unlike traditional funding, development finance provides a larger portion of funding in advance, and the loan can be taken in stages as the project progresses.

The interest is usually rolled up or capitalised with development loans, meaning it’s added to the loan balance rather than paid as a monthly instalment. This arrangement prevents a drain on cashflow during construction or renovation.

The primary factor for this type of property development loan is that you’ll need to have planning permission in place, or the deal will be subject to securing planning permission.

2. Bridging finance

Bridging loans are short-term interest-only loans which can provide immediate access to funds. Bridging finance can enable property developers to get started on a project while they secure more mainstream financing. For example, a bridging loan could be used to purchase a site while applying for planning permission, renovate an uninhabitable property or secure a deal on a property before anyone else.

Bridging loans are generally more expensive than other finance options and are only intended to offer a short-term funding solution.

3. Buy-to-let mortgage

A buy-to-let mortgage provides finance to purchase a property that will be let out. Unlike a residential mortgage, the credit amount will depend on the rental income rather than personal income.

Buy-to-let mortgages can be interest-only or capital repayment.

4. Commercial mortgage

A commercial mortgage is similar to a residential mortgage but designed for commercial properties such as shops, factories and offices.

As with buy-to-let mortgages, personal income isn’t a factor in the application process. The lender will assess the potential rental income from the property when deciding how much to lend.

5. Second charge mortgage

A second charge mortgage, or second charge loan, is an additional secured loan on top of an existing mortgage. Second charge mortgages can free up equity to improve or add value to a property.

As the loan is a second mortgage, you will need to clear the first mortgage before paying back the second charge loan, which can mean they take longer to clear.

Before choosing a financing option for your property development project, it’s crucial to assess the project’s financial viability thoroughly, consider the associated risks and consult with financial professionals.

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