Start With the End: Why Your Exit Plan Comes First in Development Finance

Why lenders start at the end

Development finance is short-term lending, usually over 12 to 24 months, against a property that does not yet exist in its finished form.

If something goes wrong part way through, the lender is left with a half-built site that is harder to value and harder to sell. That extra risk is why development finance costs more than a standard mortgage, and why lenders want to see a clear, believable route back to repayment before they commit.

A strong exit gives a lender confidence. A weak or unrealistic one can mean a lower loan, tougher terms or a decline, however good the scheme looks on paper.

The three routes out

Most exits fall into one of three categories.

Sell

You sell the finished units and repay the loan from the proceeds. This is the most common exit for houses and flats built for the open market.

Lenders will look closely at your Gross Development Value (GDV), the estimated value of the finished scheme. They will want comparable sales evidence and, ideally, a local agent’s view on pricing and demand. On schemes with several units, sales are often used to pay the loan down unit by unit, so the lender is repaid first and most of your profit tends to arrive with the final sales. It is worth building that into your cash flow.

Off-plan reservations or exchanged contracts before completion can strengthen your case considerably, as they show real demand at the prices you are forecasting.

Keep and refinance

You keep some or all of the finished property and move onto a longer-term mortgage, most often buy-to-let or holiday let. The new mortgage repays the development loan, and you hold the property for income and long-term growth.

Here the lender is really asking whether the refinance will work. The rental income needs to pass the buy-to-let or holiday let lender’s affordability test, the property needs to suit that lender’s criteria, and your own circumstances need to fit. It pays to check this before you start, not when the scaffolding comes down. An agreement in principle from the refinance lender can help, though these usually only last a few months, so it will often need renewing nearer the time.

A mix of both

Many developers sell some units to clear part of the debt and keep the rest. This can work well, but the lender will want to see both halves stack up: realistic prices for the units being sold, and a refinance that covers what is left.

What lenders will test

Whichever route you choose, expect a lender to look at:

• Evidence for your figures: comparable sales or rental evidence that supports your GDV or rental forecast, rather than best-case numbers.
• A realistic timetable: allowing for planning conditions, build delays, sales periods and buyers’ mortgage processes.
• Saleability: buyers’ mortgage lenders will usually need a recognised new build warranty and a building control completion certificate before they lend, so these need to be in place for a sale exit to work.
• Refinance eligibility: whether the property and your circumstances fit a long-term lender’s criteria.
• Your experience: first-time developers can still get funded, but lenders will look harder at the exit and may want an experienced professional team around you.

When the exit doesn’t go to plan

Even well-planned projects hit problems. Builds overrun, sales take longer than expected, valuations come in lower than forecast, or interest rates move between the start of the project and the refinance.

The real danger is running out of time on the development loan. Going past the term can mean extension fees or a higher default rate of interest, which eats into profit quickly.

This is where development exit finance can help.

It is a short-term loan taken out once the build is complete or nearly complete. It repays the original development facility and gives you more time to sell or let, usually at a lower cost, because the lender is now lending against a finished property rather than a building site.

Where the plan is to keep the property, a bridge-to-let arrangement works on a similar principle, pairing short-term finance with an agreed route onto a buy-to-let mortgage.

Have a plan B

The strongest applications show not just one exit, but a fallback.

If you plan to sell, could the units be let if the market slows? If you plan to refinance, would a sale still clear the debt if the rental figures don’t stack up? Lenders do not expect you to predict the future, but they do like to see that you have thought about it.