Choosing the right development loan for your building project: COMPARING 2 PROPOSALS

The lowest interest rate isn’t necessarily going to be the cheapest finance deal for your development project.

It’s our job as specialist finance brokers to drill into the details to find the proposal which works best for you, over the term of your project.

What this developer wanted to do

Here’s an example of a client who came to us looking for £150K to fund a ground-up build of a very nice 3-bedroom detached cottage-style house on the outskirts of a village. This is a modest first-build project, but the investigative principles are the same.

Some brokers and lenders are reluctant to work with first-time developers, but we’re always willing to look at each scheme on its own merits.

Factors in favour of our first-time developer:

• First up, this client is a chartered designer, with a track record of successful refurbishment projects.
• The project he was developing was a classic of local knowledge finding a good opportunity: he’d found a plot of land for sale for £170K (but speed was essential to beat other purchasers).
• He had plans drawn up, and planning permission.
• His proposal was well-organised, including his CV. He’d employed a construction consultant to prepare his cost plan and feasibility study.
• The numbers added up: he had £104K to put into the project; land purchase £170K; build costs £150K with a 5% contingency allowance; projected sale price £395K
• That gave him a loan to gross development value (LTGDV) at an acceptable 65%.

 He was initially looking for a 12-month loan term.

Here are the key features of two finance options we could present to him. (Neither includes an exit fee on a loan of this size.)

AT FIRST GLANCE:

OPTION 1

Term: 12 months

Gross Loan: £257K

Interest Rate: 0.99% per month

Estimated total interest: £25,530

Net Loan: £193.4K

Arrangement Fee: £5,140

Title Indemnity: £475

Set-up fee: £225

Asset Manager Fee: £475

Lender’s Legal Fee (estimated): TBC

Monitoring Surveyor Fees: £3,400

Development or Retention Admin Fee: £3,980

Day one net loan: £43,413

Net funds available towards the works: £150,000

OPTION 2

Term: 15 months

Gross Loan: £256.5K 

Interest Rate: 1.04% per month

Estimated total interest: £33,350

Net Loan: £216K

Arrangement Fee: £5,129

Title Indemnity: £395

Lender’s Legal Fee (estimated): £1,560

Monitoring Surveyor Fees: £99 (per drawdown)

Development or Retention Admin Fee: £0

Day one net loan: £66,000

Net funds available towards the works: £150,000

Looking just at the interest costs, Option 1 is clearly the most attractive. Or is it…?

A MORE CONSIDERED VIEW:

Here’s how an experienced broker will look beyond the headline rate to drill into the significant figures to find the most appropriate (and cheaper) finance package for a project:

OPTION 1

Term: 12 months Most lenders want to allow at least 3-6 months after building is complete, for marketing and sale completion. For a first-time developer this could be a very tight schedule, but this lender won’t offer a longer term. Over 15 months the comparable figures stack up differently.

Gross Loan: £257K

Interest Rate: 0.99% per month

Estimated total interest: £25,530 This looks like an impressive £7,800 less than Option 2. But the lending has only been available for 12 months.

Net Loan: £193.4K The cost of this borrowing option is less, but the client is getting less in total borrowing.

Monitoring Surveyor Fees: £3,400 Divided over all the drawdowns, and usually deducted from each advance. Say 4 drawdowns = £850 per transaction, compared with £99 per drawdown with Option 2.

Development or Retention Admin Fee: £3,980 Here’s another hefty cost: no equivalent fee for lender No. 2.

Day one net loan (towards the purchase): £43,413

OPTION 2

Term: 15 months This is a more realistic loan schedule for our developer. If he overruns on a shorter loan term he could be hit with significant extension fees.

Gross Loan: £256.5K 

Interest Rate: 1.04% per month

Estimated total interest: £33,350

Net Loan: £216K Look at how much more he’s borrowing for these costs: a chunky £22,600 more…

Monitoring Surveyor Fees: £99 (per drawdown)

Development or Retention Admin Fee: £0 Here’s a saving of £4K…

Day one net loan: £66,000 Here’s the additional £22,600 our client can access on the first day of drawdown, to get the work underway and go towards the land purchase costs. 

The most appropriate finance offer for our client’s circumstances: option 2.

Read our blogs on development finance:

5 ways a specialist broker can find you a better deal

Property development behind schedule? How to refinance to avoid penalties