Whether you’re an experienced developer or a first-timer, you need the right finance in place for your project. As each development project is unique, applications for development finance are assessed on a case-by-case basis. But how do you know whether you need regulated development finance or not and how does this differ from an unregulated loan?
Why use development finance?
Development finance is a flexible type of funding for your project, allowing you to build, convert or refurbish property. You can use it to buy land and build property from the ground up or to convert, renovate or refurbish existing property. A loan can be used for a single unit or multiple ones and is taken out on a short-term basis. This is typically between 6 months and 2 years depending on the scale of your project and your lender’s terms. The funds are released in stages as you progress through your project. This helps to ensure that you stay on track and remain within budget.
What is regulated development finance?
The Financial Conduct Authority (FCA) puts protection in place for consumers when borrowing against residential property. Although development finance is usually unregulated, this FCA protection applies in some cases. If you’re using the loan to build a property that will be your main residence, it will be regulated. If 40% or more of the development is to be used as or in connection with your dwelling, the development finance will be regulated.
For example, if you’re buying a plot of land in Pimlico with the intention of building a new home on it, your application will be for regulated development finance. Another example is if you intend to develop a property in the garden of your Bexleyheath home. In this case, regulated development finance will also apply.
Do all lenders provide regulated development finance?
Not all lenders offering development finance are regulated by the FCA. This means that you have a narrower range of options when you need regulated development finance. But don’t worry, our mortgage brokers know which development finance lenders offer regulated loans. Your application will be presented to the right one accordingly, ensuring that you benefit from a bespoke funding solution for your project.
How much can you borrow?
Loans vary greatly between development finance lenders. Some offer loans starting at £50,000, for example, while others have higher minimums, such as £200,000. Upper limits also vary considerably with some lenders being willing to provide funds of up to £2 million and others a much higher amount of £50 million. There are also lenders that don’t have a maximum limit.
The amount you can borrow will be determined by a number of factors. These include the value of the site before construction work begins, the build costs and the value of the completed project, which is the gross development value (GDV). Usually, development finance lenders offer up to 65% or 70% of the current land or property value and 100% of the build costs. When deciding how much to offer you, the lender will also take your development experience into account as well as the amount you want to borrow, the size of your deposit, if any, your financial situation and the viability of your project.
Regulated development finance vs a self-build mortgage
When building your own home, you may be wondering whether it’s better to use regulated development finance or a self-build mortgage. Self-build mortgages are usually much cheaper than development finance loans, making this option an instant plus.
The interest is usually payable monthly, however, for a self-build mortgage. This is in contrast to a development finance loan where the interest charged is usually rolled up. This means that it’s repaid at the same time as your loan. Having rolled-up interest saves you from having to find those extra funds each month. Instead, you can concentrate on the task at hand.
With both options, the funds are released in stages throughout your project. This helps to ensure that your project stays on track and you stick to your budget.
So which is best? As self-build mortgages tend to be cheaper, it’s a good idea to look into this route first. The criteria and terms are usually stricter so it’s possible that you may not be eligible or you may simply decide that you prefer the flexible terms offered for a development finance loan.
Speak with an expert about the funding for your project
Before you make a decision, speak with one of our mortgage brokers on 01322 907 000. They will discuss your project plans and financial situation in detail. This will help them to ascertain which option is best suited to your needs. If you meet the requirements for both types of funding, they’ll compare the terms, rates and costs for you. That way, you can determine whether regulated development finance or a self-build mortgage is the best funding choice for your project.