Are you a Property Developer wanting to lower the cost of your finance? Well there may be a way...
There is a general consensus that interest rate options for Property Developers are that of either a High Street Bank (often unobtainable at c. 4% over base), or those of a bridging firm (alarmingly expensive at 20%+). However this understanding fails to tell the rest of an interesting story.
One major fact exists that is often untold:
Many Development Funders advertise a monthly interest rate, but you do not necessarily get your annualised rate by multiplying the monthly rate by 12. In fact your annualised rate can be much lower. It is possible to get non-High Street Bank funding in the 5-8% bracket, regardless of location in the UK (*subject to valuation and credit committee approval). Let me to explain...
There are 4 main criteria in order to pre-qualify for this level of finance:
1. Willing and able to draw down funds equally over 9 months
An advertised, fixed monthly interest rate can turn into a significantly reduced annualised rate if:
a) the drawdowns are taken equally over 9 months, and
b) interest is charged on what has been drawn down to date, instead of applied to the total facility amount. By using the right type of finance product, and understanding when drawdowns need to happen, your interest rate, when annualised, can suddenly become a lot lower.
An example to illustrate – on a loan requirement of £500,040, if you simply multiplied a monthly rate of say 0.7% per month by 12, you would get an annual rate of 8.4%, and total interest repayments of £42,003.36.
However, if the interest is charged only on what is drawn down, and the drawdowns are taken equally over the first 9 months, with a 3 month sale period at the end for a 12 month term, the total interest payments are £26,854, and the annual rate is in actual fact 5.37%.
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2. Your firm already owns the land
If your firm already owns the land, there is no desperate need to drawdown significant funds early on, thereby keeping the rate down (as interest is charged on what is drawn down, not on the total facility amount).
However, if you are looking to purchase land, then naturally there is extra cost due to an increased capital requirement at Month Zero.
Due to the way some facilities work, if the land is yet to be purchased, the extra cost will bump up the interest rate by at least 3%, and require a deposit of between 35% and 50% for virtually all scenarios.
3. Full Planning Permission is in place
This of course means you are essentially ready to go, and can limit the period you need funding for down to the bare minimum. It is possible to get some pre-planning funding, but this will be based on the current site value under Red Book Valuation conditions (i.e. if the site does not get permission, is there enough value in the site so that the lender can get their money back through a sale of the site?). If pre-planning finance is approved, it means interest is being paid on the 3 months it takes to get to full planning, if outline planning is the current status, and therefore the rate again will go up somewhat.
4. Looking for a funding requirement of over £500k
The lower rates are available for loan requirements of £500,000 or above, subject to each case merits and valuation. If the amount you require is less than £500,000, then the “from 10%” rate products will be the starting point.
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About Chris Davidson
Chris Davidson is Managing Director of Discover & Invest Ltd.
He believes passionately in providing businesses with market-leading financial insights that have a positive impact on the bottom line. As a result, Chris helps get the best rates and terms available at any one time.
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