Development finance loans are provided primarily for clients who are building houses out of the ground, be that a single property or multiple units. This form of finance can also be used for large extensions or heavy refurbishment where releasing funds gradually in tranches makes economic sense for an applicant on a regulated and non-regulated basis. Keith Litherland of Bridging Finance Solution’s talks us through the development finance loan process:
“Some applicants may opt for a development loan rather than a conventional bridge as funds are typically released in stages or ‘tranches’, therefore, the applicant only pays interest on the actual money released rather than the overall facility. Funding for a typical house build would be spread over many months, therefore to release all build costs on day one would be extremely costly and unnecessary for a client. On a large loan facility, this methodology can save thousands in interest.
“At BFS we always first look to cover 100% of the build costs net of fees and interest for any such project. Once we have covered these costs, we can look to see if we have any remaining funds that can be used towards the acquisition if required, which could account for up to 70% of the purchase price.
“During the application process, we gather as much information as possible in order to understand the project from top to bottom. We would ask to see planning consent, drawings, details of the professional team and any contractual / warranty paperwork that goes with the build. This can seem laborious at the beginning but doing it this way ensures a smooth transition through the legal process and throughout the build program. It also ensures we are acting responsibly as a lender and helps us make sound underwriting decisions for the benefit of the client.
“The process begins with an initial application plus receipt of the aforementioned documentation. Following provisional underwriting, we typically arrange a site visit where possible, (if not a video meeting with the client) to fully understand what we are being asked to provide funds for. This also gives the applicant the opportunity to discuss any points or concerns they might have early in the process. Thereafter, we instruct valuation and appoint a QS who will monitor the build as it progresses. Once these reports are back, we formally instruct solicitors who will prepare the construction documentation, ready for the initial drawdown.
“Moving forward, each month, the site will be visited by the Quantity Surveyor. They prepare a report and sign off pre-agreed costs that have been spent on site. The report is sent to the internal team, and providing this broadly matches up with the build costs and schedule we have on our file, funds are typically released within 24 hours either direct to the client or contractor.
“We take repayment via a number of routes. Sale is most popular and we are always careful to give our applicants plenty of time at the back end to allow time for sale and not leave them under pressure. Alternatively, we see traditional mortgages and Buy-to-Let Mortgages used to repay us once the units(s) are at practical completion stage.
“The main benefits of a development loan is the staged release of funds, as this can save the applicant thousands compared to a traditional bridging loan. At BFS, we pre-agree the entire facility, providing peace of mind for an applicant that regular drawdowns do not require any additional underwriting or approval as the build progresses. Latterly I would also say flexibility – out of the huge number of development deals we execute, it is not uncommon for something to change mid-way through a build. By working closely with the applicant and their professional team from the beginning, we are keen to support the client if there is an unexpected element that nobody could have foreseen.”
Keith concluded: “We are finalising more and more development deals and this type of lending, regulated and non-regulated, is undoubtedly becoming synonymous with BFS. We are keen to be perceived and recognised as a funding partner for our clients who will work with them to realise the best possible outcome for all parties and ultimately help get the project completed within the agreed parameters.”