A residential development project can be anything from building your own house to live in, to a full-scale housing estate of 30 or more homes.
If you are embarking on a residential development project, there are a number of different ways you can approach the task of obtaining residential development finance.
If you are building a house for yourself and your family to live in, you may be able to get away with a normal residential mortgage. However, the security for the loan will have to consist of the existing property which the bank can see, which at the time of applying for the loan will be just the land. So you would probably only get a loan based on the value of the land, which might not be enough to finance the complete development. You may have to raise a personal loan to top this up, or you could refinance your existing property if you have one.
Generally, a residential mortgage is not suitable for a development project. If you are developing the site with a view to selling the property on completion, a standard 25-year mortgage is not sufficiently flexible for you unless you plan to roll over the finance into a further project. You will be better to look for a tracker or flexible mortgage that has no redemption penalties. You can then choose whether you use the proceeds of the sale to repay the mortgage, or put them into your next project. Alternatively you can make overpayments into a flexible mortgage which will enable you to draw down the finance as you need it.
If you already own the site and are only looking for finance for the development, you can usually get residential development finance from the normal range of lenders for 50-70 per cent loan-to-value. If you need finance both for acquiring the land AND for developing it, lenders will usually provide a loan for 50/50 if you are inexperienced – that is, 50% of the land purchase plus 50% of the development cost. If you have previous experience, you can usually get 70/70.
If you are developing the properties with a view to renting them out, you might well be able to use a buy-to-let mortgage. There are a wide range of buy-to-let mortgages available and many lenders base the amount they are willing to lend on the projected rental income, rather than on the costs of development. So if you have a potentially profitable project, you could cover most of your development costs this way.
Residential development projects come in all shapes and sizes, and there is just as much variety in the ways you can find to finance them. The most essential thing is that you have thought through and costed your project thoroughly before you start. If you have misjudged the market or the viability of your project, then whatever residential development finance method you choose, you will find yourself in trouble!
Please note that the FSA do not regulate commercial loans or commercial mortgages