What are the different types of property development finance?
Development finance is an umbrella term – used to describe any form of finance for building or refurbishment projects. But like the project themselves, it comes in many different guises.
Many developers will need access to some kind of funds to help them start their project, showcase their project in the market or expand their portfolios. The property development landscape is surrounded by multiple financing opportunities that suit most people’s needs.
Let’s explore seven different types of property development finance that you could use.
Commercial Mortgages
A commercial mortgage is similar to a high street mortgage, except the property against which the loan is secured must be classed as commercial. This includes shops, offices, and factories. They also vary in that instead of your income coming into play in the application process, the lender is more likely to look at your business’s income and resources, and use these to assess your ability to pay.
A plan might also be required when applying, especially if you’re a relatively new business enterprise.
High Street Bank Funding
These are a traditional way of getting funding. These are basic mortgages that can be found in most banks. The application is approved based on your ability to repay the amount and the value of the property you are buying. They came in a variety of forms from fixed-rate mortgages to those in which you only pay back the interest.
These are for properties that you are planning to live in while you complete work. These are not for properties you are planning to rent out.
Second Charge Mortgages
Like a high street mortgage, these are secured against the value of your property. But unlike a high street mortgage, you don’t usually need to be living in the property to get the loan. They can be useful for those whose circumstances have changed – such as by becoming self-employed or becoming the owner of a small business – as second-charge mortgage lenders have a broader set of criteria thereby facilitating lending for more diverse customer profiles.
Second charge mortgages are sometimes known as a second mortgage or a secured mortgage or second charge mortgages are essentially top-ups to your current loan. Instead of remortgaging to free up funds to improve or add value to a property, you can opt to take a second-charge mortgage.
Bridging Loans for Residential Property
Property developers often use them during the buying and selling of properties, during auctions, or renovation. These types of bridging loans are often used by property developers as they are flexible for several situations in which a high street mortgage would not be suitable. They are short-term, interest-only, and can be agreed upon at relatively short notice.
They can help bridge the gap between two more mainstream types of lending. They are given based on the value of a property, and your ability to pay the loan back – or your ‘exit strategy.’
Buy- To- Let
There tend to be two paths for property developers – renovating properties to sell for a profit, or buying properties and then renting. If you’re going down the route of buying a property to rent, then you will need a buy-to-let mortgage.
Setting them apart from high street mortgages is the fact that interest rates are slightly higher, a larger deposit is needed and there are some additional fees.
Borrowers also need to make sure that their planned rental income not only covers the funds repayments, but also the additional costs such as upkeep and taxes.
Commercial Bridging Loans
Just like a residential bridging loan, a commercial bridging loan is used to buy commercial properties without the wait for funding. To acquire the commercial bridging finance, the commercial property should be at least 40% commercial.
If you are looking to start a business and need help buying a commercial property, then we are here for you to help in your business venture. The procedure is simple, and the exit strategy for business owners is to refinance the loan. We believe in helping the newcomers in the business world without a team of experts who plot strategies and help improve your business planning before buying the commercial property.
Bridge-To-Let
Another form of bridging finance, a bridge-to-let loan is used purposely for those looking to buy rental properties. The exit strategy in these situations is usually refinancing the loan onto a buy-to-let mortgage. They can be used for both residential and commercial properties. Your application would be based on being able to achieve 100% rental coverage.
