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The Beginner's Guide to Construction Loans
Development finance lenders exist to provide construction loans to individuals and companies to make the best return possible over the shortest space of time, at the least possible risk. It's their raison d'être.
On the other hand, you have a terrific development opportunity with a great potential for profit - and you're not so foolhardy as to invest your life savings in it. It should be a perfect match.
So why do many first-time developers find it so difficult to get a construction loan?
The key is that word, “risk”.
If you run a business, you understand the risk in taking on a new employee. You never really know until the third or fourth month whether they're your next superstar or a disaster in the making.
Either way, you’ve spent thousands of pounds by the time you've found out.
For construction loan companies, a first-time developer’s project is akin to taking on a new starter for a responsible role without having their CV or references to check.
So if you have a project that all your entrepreneurial instincts tell you will be successful, here's what to expect as a first-time developer.
Note: if you want to get straight to the point and get a quote today, use our development finance calculator below.
Simply enter your project details, hit 'search', and get quotes from over 40 development finance lenders.
Compare the best results, filter based on interest rates or maximum loan size etc., and then start applying for a DIP (Decision in Principle).
And learn more about Property Development Finance in our short video below:
In this guide:
Construction loan application tips
The construction finance basics
What type of loan is best for construction?
Construction loan negotiation tips
Our construction loan services & advice
What do finance companies want to see in a construction loan application?
First of all, some experience.
Then they'll want to see that you truly understand the costs involved in your development and that you can be trusted to keep good cost control throughout the project.
Inexperienced developers commonly underestimate the overall costs of planning, according to a study in Development Finance Today.
The complexity behind each proposal explains why most construction finance companies won’t consider applicants who approach them directly - not even experienced developers.
Most lenders will only consider applications that have been “packaged” by experienced brokers (such as Clifton Private Finance).
What is loan "packaging"?
It’s not dissimilar to the work that a mortgage broker may have done when you were purchasing your home. But for construction finance projects headed up by inexperienced developers, the task is a lot more involved.
Construction finance is more than a proposal for finance: this will be, in effect, a fully-fledged business plan with a timeline, containing:
- The purchase of the land and/or building
- The build costs
- Costs to be incurred in finance, marketing, insurance, QS/architects, and professional fees
- Disclosure of any potential legal issues involved with a development and how they will be resolved
- Exit plan (specifically the sale or lease of the development to a third party or, if the development is to be used by you and your family, how the construction finance will be paid off (for example, taking out a residential mortgage)
Construction loan companies take the same attitude with all the proposals they receive: “expansion takes longer and costs more than you ever plan for” (as per almost every episode of Channel 4's Grand Designs).
They'll want to be confident that you understand this, and that you're not blinded by optimism.
For experienced developers, every aspect of their business plan is thoroughly interrogated and stress-tested. For first-time developers, this due diligence process will be even more rigorous. But don’t let this put you off...
An experienced team of brokers can work with you at every stage to test and finesse your proposal before presenting it to the funders who will most likely want to work with you.
See similar: Airspace Development Loans & London Airspace Development
Construction finance basics
Construction loans for first-time developers can fund the construction of new homes and commercial premises, the conversion of offices into residential flats, build-to-let properties, and renovations of existing property (including currently unmortgageable property) with an end use of either residential, commercial, or mixed (often bought at auction).
Your construction project will have three deadlines:
- Deadline 1 – purchase of land and/or existing property
- Deadline 2 – conversion of newly-bought land and/or property to desired use
- Deadline 3 – sale of property (or settling of the construction loan by the securing of a new mortgage used to pay off the remaining balance if you intend to use the property as a personal or family residence)
Your construction term will take you from the first to the final deadline.
You may need the money for a few months or a few years. You will have a window of time in which your lender will expect you to meet each deadline.
As your broker, we'll consider the amount of money you need and the length of time you need it for, and then we'll examine your options and make our suggestions for securing the finance you need.
What type of loan is best for construction?
A bridging loan is the most commonly used type of construction loan.
Construction loan option 1: bridging finance
Bridging loans are short-term loans given to borrowers to plug a gap in funding (more about our bridging loan service).
Bridging loan lenders don't generally require that you have the backing of a property portfolio.
But, as with all lenders, they look for as much comfort and safety as possible.
Which is why you need to have your proposal to be properly packaged.
Bridging loan lenders will provide construction finance of up to 65% of the value of the property. You can access the funding within a few weeks (depending on the nature of the project and your circumstances), and loan periods can range from one month to three years.
More about development finance options for first-time property developers.
Construction loan option 2: joint venture
Your second option is a joint venture with a more experienced developer: you pool your resources to access their know-how and secure the funding you need.
Joint venture funding can provide 24 months’ worth of project finance. Finance companies will provide between £150,000 and £2,000,000 of funding, up to 50% of the gross development value of your project, a contribution towards the purchase price, and up to 100% of the building costs.
Jargon explainer: the “gross development value” of a project is what your project would be worth once development has been completed on the open market.
Some finance companies providing joint venture funding will require a profit share from your project, while others do not. (Talk to one of our team to find out the options available to you).
What to negotiate on your development construction loan
Features Clifton Private Finance can secure for your construction loan
As part of the negotiations we carry out on your behalf with potential construction loan providers, we will try to secure the most advantageous deals on the following aspects of your finance:
- Interest rate
The interest rate you pay on your construction loan will directly affect the profitability of your project.
By focusing on the business case and demonstrating the safety of lenders’ cash in your project, we will aim to secure the lowest possible rate on the best terms.
We will also negotiate for your interest to be “rolled up” so that you only have to pay it at the completion of the loan term or point of settlement – this leaves more money available for your project.
Here are some example development and construction loan interest rates we've recently secured for our clients' projects:
Flipping Property?
Buying, Renovating & Selling (or Letting)
Finance Rates from
0.55% pm
1 - 18 months
Rates up to 80% LTV net
As at 20th June 2023
Ground Up Development
New Builds
Finance Rates from
0.83% pm
Up to 24 months
Rates up to 70% of GDV
As at 20th June 2023
Existing Development?
Refinance & Exit Finance
Finance Rates from
0.55% pm
1 to 18 months
Rates up to 80% LTV net
As at 20th June 2023
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- Staged drawdown
If you prefer, we can attempt to arrange a staged drawdown sequence with your lender.
This means that you only take money from your facility when you need it and, as a result, you won’t pay interest on the balance of the facility that has not been drawn down - a cheaper option.
- Length of facility
Remembering, even with the tightest scheduling and most experienced project manager on the job, that your project may overrun, we will attempt to extend the length of time you have to pay back your facility with the option of no interest penalties for early settlement.
- Highest LTV possible
Although the maximum loan-to-value for bridging finance and joint venture finance has, historically, gravitated towards certain percentages based upon the experience of the developer and the perceived commercial risk in a project, we will attempt to secure the most advantageous LTV for your finance facility possible so that you have more cash at hand for the project.
Working with Clifton Private Finance as a first-time developer
Clifton Private Finance works with first-time and inexperienced developers across the UK, helping them to put together the strongest and most credible presentations to lenders with the best possible chance of securing the funding they’re after on the most advantageous terms.
