If you are considering applying for development finance, it helps to know what kind of rates to expect. The interest rates offered on the development finance largely depend on the amount you wish to secure and your eligibility criteria. Since development finance is only offered by specialist lenders in the UK, it can be crucial to understand what charges are involved and how they are calculated.
Property development finance in London involves a lot of risks, so the interest rates charged on the loan are often higher to balance the risk. Development finance rates vary significantly. To give you a rough idea, the typical development loan above £500,000 can cost you around 7.5% per annum, while anything below £500,000 would cost around 9% per annum. However, in ideal circumstances, it is still possible to get a better rate of just 4.5%.
The interest rates charged on development finance are a lot higher than other residential or commercial mortgages. That is because development loans don’t last more than 3 years, compared to traditional mortgages that can last up to 25 years. Hence, the total interest you pay in development finance could be lesser.
How much are Development Finance Rates?
Interest rates on development finance are calculated monthly or annually, and the rates could fall anywhere between 0.5% to 0.85% per month and 7% to 9% per annum. However, the exact interest rate depends on a range of factors, such as:
#1 The Gross Development Value of the project after it is completed
In the development finance, the lenders will take into consideration the projected value of your property once it is completed. This value influences the amount you can borrow, and as a result, it will impact the interest rate.
#2 Your experience in the property development
Your experience in property development will also play a key role in influencing the interest rate. If you have accomplished successful property development projects in the past, then the lender will more likely view your application as a low risk, and hence, you can expect to receive competitive rates.
#3 The amount you wish to borrow
The amount you want to raise through development finance is also a significant factor. The more the amount you wish to borrow, the higher the interest rate you should expect to pay.
#4 The size of the deposit
Any development finance lender would want to know how serious you are about the project and that can be seen by how much you are willing to invest of your own money. The more money you invest of your own, the lesser finance you will need and hence, the lesser risk for the lender. But, if you have a smaller deposit, you will have to pay a higher interest rate.
#5 The duration for which you need the loan
The term of the loan is an important consideration in property development finance as it is dependent on when your project will be completed. Although the development finance is taken for a short period, the timeframe can directly impact the interest rates. Also, the interest is charged monthly, so the sooner you repay, the lesser the interest will be.
#6 Property development location
The location of the development project can cause to increase in the development cost if it is located in a remote area because it may be more difficult to bring materials. On the contrary, lenders may be willing to fund a project that is being undertaken in a prime location and may offer competitive rates.
#7 Complexity of the project
The complexity of the property development you wish to undertake, whether it is ground-up development or refurbishment work, will impact the interest rate you can receive. The interest rate can be higher if the project is more complex or more funds are required.
Interest in development finance is charged monthly, with the interest rate being expressed on an annual or monthly basis. The interest charged is added to the total outstanding balance.
Besides the bridging loan interest rate, you should also take other fees into account before applying for development finance. The lenders charge a number of fees, such as application fees, arrangement fees, exit fees, valuation fees, legal fees and others, which all may vary from lender to lender.
4 Key Tips to Get the Best Possible Rates
If you are like most people looking to get the lowest rate development finance, these are some key tips that you can follow to maximise the chances of getting favourable rates from the lender.
#1 Put a larger deposit. In general, lenders see a lower risk when the borrower is willing to put their own money into the project. So, if you can conveniently put 20% or more down, you have better chances of getting a lower interest rate.
#2 Take as low amount as possible. Don’t be tempted to take more than you need. You will eventually pay higher interest rates. Instead, take only the amount you require and this will eventually reduce the interest you pay.
#3 Choose a prime location for property development. Lenders usually take into account the location of the project before granting the loan. If the project is being undertaken in a prime area, they might be more convinced to grant the loan at good rates.
#4 Repay the loan as soon as possible. The term or the duration of the loan has a direct impact on the interest rates and other costs associated with the loan. Since development finance is released in stages, the sooner you choose to repay the loan, the lesser will be the interest rates.
#5 Consult a specialist development finance broker. The best way to make sure you get the most favourable rates, which are not available in the open market, is by accessing specialist lenders. An experienced broker will help you connect with suitable lenders that offer competitive interest rates.
How a Specialist Development Finance Broker Can Help You Get the Best Rate?
One last thing that will contribute to the final interest rate you pay is the broker you choose to work with. For instance, if you are starting out in property development or don’t have enough deposit, getting development bridging finance in London can be difficult. Moreover, these loans are priced on a case by case basis, which means shopping around is the only way to ensure you are getting the best deal.
With a specialist broker, you can find the best deal on development loans, especially if you are a first-time developer. A financial broker will help you compare deals from different lenders and bring desirable terms based on your application.