Funding Options to Finance Your Property Development

Funding Options to Finance Your Property Development

Property development finance is a type of funding source used to buy residential and commercial property when you do not have enough cash to pay upfront.

It is a broader term that includes various types of funding options, from mortgages to bridging finance on the property.

Each funding source works differently. They all have their own pros and cons, and hence it is crucial to analyze each of them carefully before you put in the application. Property development is a big project, which often involves a lot of money.

It is crucial to borrow money that you can quickly repay on time. Although these loans are paid over a length of time, financial ups and downs can make it tricky for you to keep up with payments.

If you have a bad credit rating and looking to finance property development, you need to be extra careful about your repaying capacity. This blog discusses each funding option in detail to help you decide which one suits your budget.

Buy-to-let mortgages

Buy-to-let mortgages are those that allow you to buy a residential or commercial building to rent out. This does not just help you increase the equity in your property over time but also helps you make money through rent.

As the name suggests, you are not permitted to use the property for your own residence. This mortgage works on an interest-only basis, which means you will be paying down interest every month throughout the term, and at the end of the loan term, you will pay off the principal amount.

In case you do not have enough money to make the balloon payment, you will either sell the property or take out a new mortgage on it. You will have to arrange a bigger deposit size of up to 25% because these mortgages are more expensive than standard mortgages.

When the property is not vacant, the interest payments can be covered by the rent amount, but it will make it difficult for the lender to get money back when it is not occupied. To qualify for buy-to-let mortgages:

  • You must possess your home either outright or with the help of a mortgage.
  • You must have a good credit rating.
  • By the time the mortgage term ends, your age should not be over 70 or 75 in some cases.

Buy-to-sell mortgages

Buy-to-sell mortgages are those that fund property that you buy to do up, and then you sell it. Standard mortgages will not allow you to sell the property within six months; thus, these loans are suitable. These mortgages do not come with any type of restrictions about selling your property.

These mortgages carry high-interest rates, and you will have to arrange a deposit of about 25% of the value of the property. If you have adequate funds to buy the property, you can seek a personal loan for doing it up. These loans are generally used for funding small changes in your property.

These loans will carry a high-interest rate because they increase the risk of the lender, yet they are affordable. Since the size of the loan is not too big, you will soon get rid of debt. Given below are the requirements to qualify for these loans:

  • A lender prefers property that is in a good location. Property in the outskirts will not convince the lender about your selling plan.
  • Your credit score must be good.
  • A lender would like to know about your selling plan and the alternative of remortgaging a property when you fail to sell it out.

Bridging loans

Bridging loans are also known as gap financing. They are not a mortgage but a short-term funding source that allows you to fill the gap at the time of buying a home or doing up the property.

If you are looking to buy a new home and you are to wait for your current home to be sold, you can borrow money using the equity of your existing home. These loans typically last for one year and carry high-interest rates. Here is what you need to qualify for the bridging loans:

  • You will have to arrange security to be eligible for these loans.
  • Some lenders may require you to own additional property at the time of taking out these loans.
  • You should present your lender your strategy to convince them.
  • The lender will likely require you to have earlier triumphs in property development projects.

Property development loans

Property development loans can be used for various purposes, whether you need a lot of money for refurbishment or you want to build from scratch. The loans, as mentioned earlier, can restrict you about the use of money, but you can use property development loans for any purpose.

These loans will likely let you borrow a large amount of money. Interest rates depend on the borrowing amount and other factors like your credit rating, repaying capacity, and previous record.

  • Property development loans are given based on the project completion. You will have to disclose to your lender the phases of each stage of completion.
  • You will need to give the report to your lender when one phase is completed so that the lender will lend you money for another phase.

The bottom line

There are several property development options that you can use, but each of them has its own purposes. It relies on the amount of money you need and your eligibility. Since these types of loans carry high interest, no lender will lend you money in case you have a bad credit rating. Some lenders approve applications for bad credit ratings, but in that case, you may need to arrange a larger deposit. Even if you are able to arrange a large deposit, you should try to avoid it. First, you improve your credit rating and then apply for a financing option that suits your budget. They will be much more manageable if you have a good credit rating.

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