Property finance is usually a big requirement for many property developers looking to venture into real estate development for the first time or grow their real estate portfolio. Luckily, there are many property development finance options available to fit most types of real estate financing needs.
The following are 7 types of financing options for property development:
1. High-Street Mortgages
High-street mortgages are an example of simple and ordinary mortgages issued by most banks. The success of your application process for this loan depends on your ability to pay back all the money owed and the value of the real estate you intend to acquire.
High-street mortgages are available in various forms like interest-only loans where the borrower only pays the interest due on the loan, or fixed-rate loans where the interest rate on the loan is constant for a given duration.
These types of loans are ideal if you are looking to finance properties that you will live in until all construction is complete. On the other hand, they are not appropriate for financing rental properties or properties classified as uninhabitable.
2. Second-Charge Mortgages
Second charge mortgages are also called second mortgages or second charge loans; they are a form of fill-up loans taken on top of an existing loan. Instead of refinancing your current loan with another mortgage to release funds for improving and developing your property, you may choose to take out a second-charge mortgage.
Similar to a high-street mortgage, second-charge mortgages are secured by the value of your real estate. However, unlike a high-street mortgage, the borrower of a second-charge mortgage needs not to live and stay in the property to qualify for a high-street mortgage.
High-street mortgages are ideal for borrowers whose financial circumstances have changed, for instance, the borrower has become self-employed or an owner of a small enterprise. This is because second-charge mortgage providers have a wide-ranging set of conditions that support lending to diverse borrower profiles.
3. Commercial Real Estate Mortgages
Commercial mortgages closely resemble high-street mortgages in many ways apart from that the property used to secure commercial mortgages must be a commercial property with strong income-earning capabilities. Commercial properties include shops and retail spaces, factories, and office blocks.
This means, when considering your loan application request and determining your ability to repay the loan, the lender focuses on the income of your business and assets as opposed to your personal income.
When applying for a commercial mortgage, you may need a comprehensive business plan showing future income projections, more so if you relying on a new venture for proof of income in your application.
4. Buy-To-Let Type Of Mortgages
One of the two main ways developers invest in real estate is renovating old properties and selling them off to make a profit. Alternatively, property developers may purchase properties and rent them out to tenants to earn annual income and make a return. If you opt for buying a property and later lease out the space to tenants, it is best if you go for a buy-to-let mortgage.
Buy-to-let mortgages differ from high-street mortgages in that the former has marginally higher interest rates, bigger deposit requirements and various additional loan fees compared to high-street mortgages.
It is worthy to note there are some recently enacted legal changes soon to come into effect and make the loan application process for a buy-to-let mortgage more stringent for potential borrowers.
Borrowers of buy-to-let mortgages must ensure their rental income is high enough to service mortgage repayments and meet other costs such as property taxes, utilities such as water and power, and property maintenance work.
5. Bridging Loans For Residential Properties
Residential bridging loans are popular among property developers because they are more flexible and more suitable for several financing needs compared to high-street mortgages. Residential bridging loans are short-term loans where the borrower pays interest only for an agreed period; they can be organized and agreed upon at pretty short notice.
Property developers prefer to use residential bridging loans when buying and selling the property, when carrying out renovation work, or during property auctions.
Bridging loans can help finance property needs between two or more types of property finance options. For instance, a property developer may use residential property loans to buy a property while waiting for the finalization of high-street mortgages.
Residential bridging loans are issued based on the value of the borrower’s property and the borrower’s ability to pay back the loan. The ability to retire the loan determines the efficacy of the borrower’s exit strategy.
6. Bridging Loans For Commercial Property
Like residential bridging loans, commercial bridging loans are used to fill the financing gap when you are buying or renovating commercial real estate.
In this case, commercial property is classified as any building where 40% of the property’s income is generated by commercial activities. For instance, a commercial property can be a shop with a flat on top or a brownfields site that is just about to receive its planning approval.
Commercial bridging loans are useful for financing the expansion of a small enterprise through the purchase of new properties.
7. Bridge-To-Let Loans
This is a form of bridging loan that is particularly used to purchase rental properties. The borrower often retires a bridge-to-let loan by refinancing the debt using a buy-to-let type of mortgage.