Having gone through a sticky patch during the financial crash, the availability of development finance has returned. This has come from the traditional banks and from development bridge providers.
In the early days of the crash, the traditional banks in all practicality stopped lending on developments and it is only in the last few years that they have been prepared to re-open their lending books. The void that was left was taken up by development bridging lenders. Post-Crash, as interest rates on deposits plummeted and stock markets waivered, a good amount of private money came out of those investments and went into establishing new bridging finance companies. In fact, there was a period when a new one appeared almost every week. That trend has now reversed. Some of those companies have gone out of business by offering unrealistically cheap products whose margins were too skinny and we are left now with the solid but logical products from the more established lenders.
The interest rates on offer are interesting. Obviously post-crash we saw the Bank of England (BoE) base rate tumble. Currently, the Banks are offering cheaper rates than pre-crash but are working on a larger margin over BoE base. In contrast, the bridging lenders have kept their rates pretty much the same. It is not unexpected to find that interest rate is one of the key features between lenders. The difference in interest rates available from traditional banks and from development bridging lenders remains disappointingly large. However, they are targeting different markets, so there is at least some logic.
Whereas before the Crash they were prepared to consider a wider variety of projects, the traditional banks now lend exclusively to established development professionals like architects and established building companies. Also, they are looking for medium to large projects; so, building or refurbishing a house or two is not for them.
The development bridging lenders, on the other hand, are less fussy about the applicant’s professional status, but you still need to prove that you know what you are doing or at least have a professional running the project who does know what they are doing. The project size can be much smaller with development bridges, sometimes as small as a refurbishment.
There is one lender, Castle Trust, that has a very interesting product which is a hybrid. It offers choices not available with other lenders and it is really worth a look. Unfortunately, it is not an easy product to explain on paper, so we suggest that you give us a call.
We find that one of the issues which is of greater cost to the project is not the interest rate at all. Obviously, it is nice to find the cheapest lender but the factor that truly saves you money is time. If you are having to use a development bridging lender, the difference in interest rates between the cheapest and most expensive lenders will only equate to a month or two of project time. So, it is more important to plan and keep on top of the build phase. Delivery times on materials and reliability of certain trades is difficult to plan exactly, but you must try. Of equal importance is having a pre-organised exit strategy at the end of the project. If that is to be sale, then selling “off-plan” during, or even before build starts, needs to be organised. If the exit strategy is to be refinance onto a longer term loan, then having that effectively in place to the extent of having a lenders written “Decision In Principle” is important. Not only will you have peace of mind that it can be done but it will enable you to invoke that lenders offer quickly. With development finance, either bank or bridge, always costing more than long term finance, being able to get out quickly and easily is desirable.
The last point of note when using any development finance provider is the ease of dealing with them.
- Lenders seldom allow “dual representation”. This means that they will use their solicitor and you must appoint your own. Out of experience, we warn you that the questions asked by the lender’s solicitor are exhaustive, lengthy and frequently frustratingly stupid. You may well have passed the underwriting criteria from the lender himself quite quickly, but be prepared for delays in the release of the loan caused by their solicitor.
- When you require stage payment of funds, the surveyors appointed by lenders are given a remit by that lender and that differs from lender to lender. Some will be very strict. If lending is on a Loan to Cost basis, they may want to see every invoice. If lending is on a Gross Developed Value basis, be prepared for some surprisingly conservative stage valuations.
Development finance is readily available today. Finding the cheapest is straightforward, but we suggest that you need help to find the right lender.