Development finance is a form of short-term funding, which provides a lump of cash to assist with the refurbishment or construction of commercial or residential properties. The term development finance can be used to refer to mortgages and term loans.
How does it work?
A lender will provide a sum of money to purchase a property and complete the refurbishment or construction work. Depending on the price of purchasing the building, the lender will offer an initial loan which subsequently funds the cost as a whole. However, this is usually provided in arrears and once construction commences, the first part of the costs must be funded by the client. Compared to a traditional loan, development finance will take the value of the completed property
into consideration. This allows investors and builders an opportunity to undertake high-profit schemes that would usually be unachievable, and potentially receive a higher return on investment.
What are the pros and cons of Development Finance?
Development finance tends to be more complex than most mortgage or loan types because of the required upfront funds and phased payments that are tied to the building process. This causes prolonged negotiation times, additional fees and comprehensive paperwork.
That’s not to say there aren’t many advantages of development finance over other forms of financing, for example:
- They appeal to borrowers who want to increase the value of a property but require the funds to do so
- A substantial proportion of cash isn’t needed because they’re short term loans
- It appeals to borrowers who require funds to increase the value of their property
- It covers the purchasing of the property, as well as the contractors and materials
- It can be a quick way to raise capital as funds can be available within a couple of days
How do you pay back a Development Loan?
Most development loans have a payback period of up to 24 months, but this can depend on the nature of what scheme is being funded. When you do repay the loan, there are a couple of ways that you can:
- Repay the full amount using the sale proceeds from the finished property(s)
- Refinance on to a long-term loan if the borrower wants to rent out the finished property or keep it for themselves.
Monefi offer financial services specialising in Income Protection, if you’d like to learn more speak to one of our advisors today.
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