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Property Development Mortgages – What Are Your Choices?

Property development costs money. It’s a very exciting thing to get into, and can be incredibly profitable. But you need a lot of money up front, and property development mortgages can be very complicated.

Those looking for property development mortgages have a number of options.

  1. Going for an ordinary mortgage. Raising money for your project this way is not impossible. However, you may find that a standard 25-year mortgage is not suitable for you as a developer. As a developer you have specific needs which are quite different from those of someone buying a house to live in. If you plan to sell the property when you have completed it, the standard loan period can be too inflexible.
  2. Developers often find it useful to choose a mortgage with no early repayment penalties. A tracker or a flexible mortgage often works well. This way you can sell the property and repay some or all of the loan without facing extra charges.
  3. Another possible way to finance your development project is to make overpayments into a flexible mortgage. This can be a good source of working capital for development as you can draw down the funds as and when required, without having to re-apply each time.
  4.  Although house prices seem to have stopped rocketing upwards for the time being, the house price inflation over the past decade does mean that most property owners have substantial equity in their property. Many developers have found remortgaging to be a useful option for financing their projects. The advantage of this is that they can repay at low residential rates, and also the lenders do not need to scrutinise the purpose of the loan.
  5. Any of these options would provide a comparatively easy and less stressful way of finding property development mortgages. However, if none of these options is open to you, you should be looking at staged funding over, say, an 18-month period, rather than a long-term mortgage. This would be on an interest-only basis with the interest rolled up to pay at the end of the period. If all goes well this would allow you to sell the property and pay off the mortgage. Otherwise you would be looking at longer-term financing.


Obviously, when you are just starting out, it can be very difficult to know where to start looking or which option to choose. The best place to start is probably with a commercial finance broker who specialises in development finance. The broker will help you work out which is the best option for your situation, and where to start looking for what you need.

 

E Berry May 2008

Please note that the FSA do not regulate commercial loans or commercial mortgages

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