Embarking on a property development project can be a daunting challenge as there is a huge amount to consider finding the right property, assessing work requirements and coming up with accurate costings and timing are but a few of the initial challenges. Amongst these is of course is actually finding the fund required to get started. The property finance available to you will differ depending on your personal circumstances and the project itself. Below is a basic outline of some of the funding options you may wish to consider, and it goes without saying that once you have done your initial research it is imperative you discuss your requirements with a financial advisor or broker to help you make the right decision for you.
Is a mortgage right for my project?
There are a number of different mortgage types available and so it is likely that most property development projects will find some kind of mortgage that will fit it’s needs.
A residential mortgage only tends to be the best viable option if you are purchasing a property to live in or you may wish to re-mortgage if your bank will allow it in order to fund renovation work a current property. This is partially because mortgage is intended as a long-term finance solution and the requirements are stricter than some other property finance options.
If you are a property developer with a strong portfolio already, you may want to consider a commercial mortgage as a viable way of freeing up funds to purchase an additional property by consolidating existing mortgages that sit on your portfolio properties. As well as the standard requirements for meeting mortgage eligibility, the lender will want to have evidence of a successful portfolio and basically ensure that you are a safe bet by examining your current property situation.
If you are carrying out your project development on a property that you intend to rent out once renovations are complete then you might consider a buy to let mortgage. These kinds of mortgages are very similar to a residential mortgage, but they allow you to make money from someone else living in the property and they are likely to have different fees associated with them. As with a standard residential mortgage, your finances and credit history will be taken into account when the lender is deciding if you are eligible for the loan amount. In addition, the lender will expect you to be able to show the rental income on the property will be at least 125% of your agreed mortgage repayments.
Bridging loans can be a brilliant solution to financing your property development so long as you do your research. In the past, bridging loans have been seen as a slightly ‘shady’ method of securing a loan but nowadays they are a perfectly viable solution for property development in the current climate. A number of highly reputable lenders offer them, for example you can get a Santander Bridging Loan as well as a number of other high street banks such as NatWest and Barclays. Bridging loans are meant as a short-term financing option and tend to rely heavily upon the worth of the property you are purchasing with the funds. Usually, you will only get a bridging loan for a 12-month term with the intention of selling on before the 12 months is up or having the property in a state fit enough to get a good quality long term financing option such as a mortgage for. Bridging loans tend to have higher interest rates and fees associated with them but they in effect put you in a position to be able to act as a cash buyer. This position can be priceless when trying to get a great deal on a property that needs a lot of work or if you are interested in a property that is up for auction, where you need funds within days of the auction completing. Quite often a bridging loan will be completed inside of 2 weeks which is much quicker than traditional lending methods.
Are there other property funding options?
In a word, yes. There may be other funding options that are more or less suited to your requirements, so it is extremely important to do your research. Your funding option could make or break your budget when it comes to property development. For example you may miss out on the perfect auction property if you didn’t also explore auction finance, which tends to be a much quicker funding option due to the nature of the purchases you would be making.
There are a number of factors that lenders will look at when making a decision as to whether they should provide you with a loan and it is important that you consider these prior to making a decision on the finance option most suitable for your project.
The valuation is one of the most important parts of securing your loan and no matter what finance provider or lending option you choose, it is likely that you will need to pay for that lender to have a valuation carried out on the property before they will provide funding. For all lenders the valuation will help them to assess how much they should lend you and what the LTV should be. When it comes to providers of Bridging Finance, it is easily one of the most important elements as often, those providing bridging finance base the loan purely on the value or potential value of the property itself. Unlike mortgages, they are less interested in your background and personal circumstances as they expect the loan to be short term and, if all else fails, the property itself will end up being their repayment. Bridging lenders may still be interested in your personal circumstances to an extent as it will give them an idea of the risk in the project and your ability to pay the monthly interest rates. You may find that your credit history, current income, other assets and property/project history come into play when applying for all or any of the above finance options, but these additional circumstances are likely to play a much bigger role in the decision making for a standard mortgage provider.