How Do Property Developers Raise Finance?

Property developers have different property financing options that they rely on, which include:

Cash

If you have it, cash is probably the easiest way to finance property development. Property developers that use cash can forego interest and keep the development as cheap as possible because they don’t have to depend on loans. If you are able to afford using cash, it should be a top priority when sourcing income for your property development project.

Buy-to-Let Mortgage

If you plan to create a rental income from your property, you may be eligible for a specialized mortgage. In most instances, the mortgage will have clauses prohibiting letting or subletting, but the buy-to-let mortgage lets property owners rent out rooms or even the entire residence.

The eligibility criteria when it comes to buy-to-let mortgages, however, varies from standard residential mortgages. Lenders usually require a deposit of between 25 and 40 percent and experience higher fees. The mortgages typically operate on an interest-only basis too.

Buy-to-Sell Mortgage

Run-of-the-mill mortgages will typically lock you in for 2 or more years before you are eligible to sell. If you are looking for a fast turnaround after a property renovation, you will be required to sign on for a buy-to-sell mortgage.

Buy-to-sell mortgages also usually attract higher than normal fees, with a bigger deposit also needed. This type of mortgage, however, has the flexibility of selling as and when you are ready.

Bridging Loan

Bridging loans are particularly for short-term borrowing. Instead of the typical annual interest rates, bridging loans typically have monthly pricing. Bridging loans are used primarily in a property chain, where one is looking to purchase a new property but haven’t sold their current house yet. A bridging loan credits you for the short period until your property is sold, and you have funds to pay back the amount.

Bridging loans are of two types: open and closed, which determine the payback period. Bridging loans are more expensive to hold than regular mortgages but are available on a wider range of properties that a standard high street mortgage might not offer.

Specialized Property Loan

You may be eligible to receive funding from a private source offering specialized property loans or a rolling credit facility. Separate from high street mortgage companies, there are hundreds of sources whose focus is on raising finance for residential or commercial development, and even individual brokers that can manage the transaction.

Specialized property loans are usually handled privately, but they are still subject to government regulations. This can lead to fluctuations in the standard rate of interest, for example.

Personal Loans

Personal loans are also referred to as unsecured loans and aren’t secured against property or any other kind of asset. Instead, they are a quick credit option used by many people to make a large purchase (such as a property). Repayments are usually fixed rather than flexible and you are typically eligible to pay back your loan in full before the end of the term, if you are able to.

Written by Julie Hanson

Julie is passionate about property – development, investment and portfolio planning. Along with husband Alec, Julie is actively building a property portfolio while helping others to do the same.

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