Construction Finance from 6.5%

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What is a Construction Loan?

Construction finance is a broad category of funding solutions rather than a specific financial product. Construction loans can be taken out to cover the costs of most types of property construction and development projects. They are issued in the form of a short-term loan for repayment within six to 30 months (variable, starting at 6.5%).

Finance for construction projects can take on a wide variety of forms. Some lenders specialise in bespoke finance for construction companies, while others offer more generic “off-the-shelf” construction project finance solutions.

In all instances, construction loans are issued to UK developers and construction companies looking to cover the costs of planned or in-progress property development projects. As construction business loans can be arranged quickly, they can be ideal for covering unexpected financial gaps in time-critical situations.

How Does Construction Finance Work?

The best business construction loans are those issued as bespoke products, tailored to meet the exact requirements of the borrower. All construction loan financing agreements are unique, but the logistics of how construction finance works are fairly constant.

A brief overview of how loans for construction and development work in practice:

  • An application is submitted by the developer with a detailed project plan and a full disclosure of their financial requirements.
  • If the lender is satisfied with both the project plan and the professional background of the applicant, an offer will be made up to a maximum LTV of 75% of the project’s total estimated value upon completion.
  • Both parties sign the contract and become bound by its terms and conditions, at which point the agreement becomes official and the first installment of the loan is paid into the developer’s business account.
  • A surveyor is hired by the lender (at the cost of the borrower) to monitor the progress of the project, and each subsequent loan instalment is released only when the lender is satisfied that the project is progressing as planned.
  • In the meantime, interest accrues on a monthly basis, typically at around 0.5% per month, and is added to the full balance of the loan, repayable in a single lump sum on an agreed-upon future date.

While most UK construction loans can be issued up to a maximum LTC of 85%, it is also possible to arrange funding to cover 100% of a project’s costs in special situations. Second-charge development finance products and mezzanine finance solutions are available where developers would prefer to minimise the use of their own on-hand capital.

The graphic below explains the typical process with and without construction finance:

Construction Finance infographic

How Much Do UK Construction Loans Cost?

Construction finance rates vary significantly from one product or lender to the next, highlighting the importance of shopping around for a good deal.

As of 2023, construction loans and development finance products are typically being offered at around the 0.5% per month mark (sometimes less).

You will also be expected to provide evidence of a robust exit strategy for repayment of the facility, which will influence the construction loan rate you are quoted.

Contact a member of the team at Rosewood Finance to discuss construction finance, self-build loan interest rates, and costs in more detail.

Construction Finance

Who Uses Construction Finance?

The vast majority of construction finance products are issued exclusively to experienced developers and construction companies with a proven track record. Loans for construction businesses are recently established, and first-time developers are available, but most specialist development finance loans (the loans with the cheapest rates) are granted only to experienced developers.

Developers in general prefer to limit (if not minimise) how much of their own on-hand capital (equity) they use to fund their current and planned projects. By seeking affordable finance from reputable providers, established construction companies can conduct multiple development projects at the same time.

Depending on your requirements and the lender you work with, it is possible to borrow anything from 75% to 100% of a project’s total costs. All with flexible terms and conditions, coupled with rolled-up interest for added convenience (no monthly repayments in the interim).

With interest rates starting at as little as 0.5% per month, construction financing can be uniquely cost-effective when repaid promptly. However, specialist construction loans and development finance facilities should never be taken out with longer-term repayments in mind.

What Are The Benefits of Construction Finance?

Construction finance enables property developers and construction companies to work on ambitious (and often multiple simultaneous) projects without having to rely on their own working capital.

A few of the many benefits of a self-build loan include:

  • Flexibility: Construction finance can be customised to meet the specific needs of a project. All terms and conditions are negotiable, enabling the applicant to tailor the funding solution they receive to the exact requirements of the project in question.
  • Cost-effective: Construction finance can be more cost-effective than other financing options because the lender is often willing to provide funds at a lower interest rate. The lender may be willing to extend the repayment period, resulting in lower monthly payments.
  • Increased Profitability: By securing construction finance, developers can move forward with projects that may have higher potential profitability. Something that can ultimately help developers have the best possible ROI from their projects.
  • Risk Management: A flexible construction finance agreement can play a key role in mitigating financial risk for the duration of a project. With specialist construction finance, funds are released over a series of stages, aligned with the successful completion of major project phases. In the event that the project hits any setbacks or does not progress as planned, all subsequent instalments will be withheld, and the developer’s overall debt will be reduced.

In the right hands, construction finance has the potential to be a flexible, affordable, and scalable solution for construction companies and property developers, tailored from scratch to meet the unique requirements of the applicant.

Essential Documentation for Development Finance

Documentation requirements differ from one lender to the next, depending on the nature and extent of funding required. However, most lenders will require prospective borrowers to provide the following as the minimum acceptable documentation to support their application:

  • Evidence of the property or project’s current value
  • An independent expert’s valuation of its projected future value
  • A breakdown of all development, construction, and renovation costs
  • Professional profile, resume, and success record of the main applicant
  • A full portfolio of completed projects and achievements to date
  • A detailed overview of all project contributors and hired contractors
  • Copies of all relevant planning permission applications and documentation
  • Extensive financial projections and evidence of an exit strategy
  • Proof of contingency planning and due diligence

It’s important to remember that the more convincing and extensive the evidence you provide, the higher your likelihood of qualifying and getting a competitive deal.

If you would like to learn more about the potential benefits of construction finance or have any questions regarding your own funding requirements, please call the team at Rosewood Finance anytime.

Is it Possible to Get a Construction Loan with Bad Credit?

The short answer is yes, but it depends entirely on the rest of your profile and the strength of your application.

Most lenders reserve their most competitive deals for applicants with excellent credit and an outstanding professional profile. However, this does not mean that individuals and companies with imperfect credit are entirely out of the running for a self-build loan.

Bad credit construction loans are available from a broad network of specialist lenders. Where poor-credit applications are considered, the overall strength of the applicant’s case determines their eligibility.

For example, if your construction company has a spotless track record and you can provide full evidence of numerous completed projects of a similar nature, a “blip” on your credit file may not be the end of the world. Even so, it is important to ensure you target the right lenders with your applications, as many development finance specialists will not work with subprime applicants.

How Long Does It Take to Arrange a Construction Finance Loan?

The time taken to arrange development financing will determine how quickly you can provide your lender with the required documentation. The application process also involves a full survey of the project in order to formalise its current value and projected future value.

Teaming up with an experienced broker at the earliest possible stage can pave the way for a smooth and seamless application. Once the formalities have been taken care of, a construction or self-build loan can be arranged, authorised, and accessed within a few working days.

Construction finance can therefore be ideal for covering time-critical costs in a pinch. Whether you are planning ahead or in need of urgent support with an unexpected financial gap, a short-term construction finance loan could be just the thing.

When Do I Pay Back My Construction Finance Loan?

Construction finance is a highly flexible facility, with terms and conditions that differ significantly from one agreement to the next. This includes repayment obligations, which can be tailored to suit the requirements of the applicant and the business.

The vast majority of specialist construction loans are repaid on an agreed-upon date (inclusive of interest and borrowing costs) for a single lump-sum transfer. No monthly repayments are required, enabling the applicant to keep better control of their on-hand capital.

However, some lenders provide borrowers with the option to make monthly instalments to cover the interest payable on the loan (and any other applicable borrowing costs). The initial loan sum will then be returned in full at a later date.

If property developers or construction businesses choose to repay their loans over a longer period of time, they may be able to move to a commercial mortgage, a BTL mortgage, or a similar facility at the conclusion of the loan term.

Can I Qualify For a Construction Loan As a New Property Developer?

Yes, but you will need to target the right lenders with your application to ensure you present a convincing case. Many development finance specialists offer their services exclusively to established lenders with a provable track record. Elsewhere, others are more than happy to support first-time developers and entrepreneurs in the construction sector.

Broker support is essential if you are applying as a new property developer. Call or email Rosewood Finance anytime to learn more.

Can I Use a Construction Loan for Any Type of Property Build?

Construction finance loans and development finance facilities are uniquely flexible products. This can be used to fund the construction, renovation, or repurposing of almost any type of property, including but not limited to the following:

  • Residential and commercial conversions
  • Mixed-use properties
  • Sustainable homes and businesses
  • Refurbishment of derelict properties
  • Construction and development of non-standard properties
  • Regulated and unregulated developments

The flexibility of construction finance goes far beyond that of a conventional mortgage, where strict limitations apply in terms of eligible construction and development projects.

It is vital to work with an expert broker to ensure you apply to the right lender who can approve development finance for your type of intended build.

Can I Qualify for a Construction Loan Without Planning Permission?

Yes, but you will usually be offered a more competitive deal after obtaining planning permission. Similarly, qualifying for construction funding is significantly easier when planning permission has already been obtained.

You do not need to delay your application if the lender is completely confident that planning permission will be granted and that the building project is viable. However, if there is any doubt in the lender’s mind regarding planning permission, your application may be delayed or even rejected.

What Other Fees and Charges Apply to Construction Loans?

The APR will usually be accompanied by several additional borrowing costs, and affordability varies significantly between lenders, emphasising the importance of shopping around before applying.

A summarised overview of typical fees and charges applicable when applying for construction finance:

  • Any arrangement or brokerage fees that may apply, which can be anything from 1.00% to 2.5% of the total value of the project,
  • Early exit fees may also apply if you intend to repay your loan early, though many established lenders waive them to incentivize prompt repayment.
  • Legal and professional fees apply to services provided by solicitors, project managers, architects, and surveyors. All of which are covered by the applicant.

Each of the above costs is open to negotiation and can be kept to the bare minimum by working with the right lender.

FAQ’s About Construction Loans

What types of projects can be financed with construction finance?

Most projects can be financed relating to residential and commercial, mixed-use, and industrial developments.

What are the construction loan risks?

The biggest risk associated with construction loans is that of asset repossession in the event of non-repayment. It is therefore essential to consider all possible eventualities before applying in order to ensure that you can comfortably repay the facility within the agreed-upon timeframe.

How is the interest rate for construction finance determined?

Construction finance specialists calculate interest rates (and associated borrowing costs) on the basis of various criteria, such as the creditworthiness of the borrower, the risk levels of the planned project, the LTV of the loan, how quick the repayment is, and the track record in the property development sector.

Can construction finance be used to cover land acquisition costs?

Yes, some lenders issue construction finance loans that can be used to cover land acquisition costs.

Can construction finance be used for renovation or remodelling projects?

Yes, construction finance can be used for a broad range of remodelling and renovation projects. You do not have to use construction finance exclusively for new property builds, though some lenders impose certain restrictions on how their funds can be used.

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