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How to Get Development Exit Finance as Your Building Project Nears Completion
When a property development project is coming towards the end of its agreed term of finance, unexpected delays in finishing the build or finalising sales can have a major impact on the cost of your finances and the profitability of your development.
Written by: Sam Hodgson
Development exit finance wins on three counts:
- Typically it’s going to be cheaper
- It starts the clock again on your exit date
- And it gives you the capital to get your next project underway
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Development finance is expensive, reflecting the level of risk carried by development finance lenders, particularly at the early groundwork stage of the build. But risk decreases as the build progresses, and by the time a project is heading into the final marketing stage, the increased value of the completed works could gain you significantly cheaper borrowing if you refinance to reflect the lower LTV.
The cost of unexpected delays to a development project
There are several ways project overruns can start costing you significant amounts of money:
- Higher interest rates: The longer it takes you to repay lending at the relatively high interest rates of development funding, the greater the cost of your borrowing. When a project is nearing practical completion, you can leverage the improved LTV to refinance at a lower rate.
- Servicing interest monthly: With a development finance contract that rolls up interest for payment at the end of the loan term, you have maximised your cash flow to pay ongoing build costs. But if you overrun the original loan term, you may be required to pay the interest accrued so far and to start paying monthly interest until the lending is repaid.
- Extension fees: Many lenders will charge significant fees to extend the terms of your original loan. It’s often cheaper to refinance.
How Development Exit Finance Works
- Development exit finance is a bridging loan offering flexible short-term borrowing that can be accessed quickly.
- It allows you to pay off your existing development finance, borrow with lower interest rates, and avoid expensive extension fees.
- Development exit finance is usually offered for between 1 and 18 months, and there are typically no early repayment charges.
- Finance can usually be arranged in as little as 5-7 working days, making this the most suitable financial product if unexpected delays mean you must arrange to refinance quickly.
- You usually have the option to roll up interest or service it monthly.
- Suppose there is still work outstanding on the project. In that case, you may be able to choose a flexible drawdown facility, allowing you only to take the capital as and when you need it (keeping your costs down as you’ll only pay interest on the money you access).
- If the development consists of multiple lots, you may have the option to retain a portion of each lot's sale price instead of waiting to take your profit from the final lot. Or you can choose to apply the sales income towards repaying your exit finance.
Need funding for your development project? Learn about Property Development Finance in our video below:
The 3 Compelling Reasons for Accessing Exit Finance
1. Exit Finance is Typically Cheaper
Typical development finance rates can range from 7% to 14% pa, depending on the size of the loan and the level of lender risk.
Exit finance rates can start around 5%, which translates to substantial savings on the cost of borrowing. Interest on exit finance is retained, allowing you to apply all your available capital to complete the build.
2. Exit Finance Extends Your Borrowing Term
Developers using regulated finance, secured against the value of a residential property, have the term of their finance limited to 12 months, which is a tight timetable for building works plus completing on sales if that is the agreed exit.
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Exit finance provides a much-needed breathing space, allowing final-finishing and the marketing programme to proceed so the property can achieve its optimum price.
3. Exit finance releases funding to get the next project underway
Medium-scale developers typically take their profit from the last units sold on development: a timescale that militates against getting the subsequent development underway.
The most cost-efficient developers can have site acquisition, design and planning in progress on their following scheme. At the same time, the building is finalised on their previous project, and they are ready to commence groundwork when their major contractors are available.
How Much Can You Access in Exit Finance?
If you own the property or land outright (unencumbered), your application is much more robust, and you should be able to access 100% of the development costs.
When Do You Need to Start Looking for Exit Finance?
Realistically, at least three months before your development finance exit deadline to give us time to investigate lenders who will suit your circumstances and have finance available for draw-down in time. As opposed to approaching the only lender who will consider your application.
Lenders usually only consider providing exit finance for projects at the practical completion stage. We have been able to arrange to lend for developers who aren’t yet at the handover: if this is your situation, give us a ring, and we can discuss what we can do for you.
Find Affordable Development Exit Finance
Clifton Private Finance has a team of specialist brokers who can help you find the best deals on development exit finance from across the market.
With established contacts with all the leading lenders, we can help you find the best interest rates and fees currently available.
To see what we can do for you call us at 0117 313 5914 or book a free consultation below.
