Having worked incredibly hard to complete your development, overcoming several challenges and dealing with numerous sleepless nights in the process – you have finally obtained your Practical Completion Certificate. So at this stage the development focus changes from build to sell.
However, the sales process is not immediate unless you have to sell at under market value and give away all your hard-earned profit. It can be almost impossible to plan future projects until all the property units have not only exchanged but completed and this process is subject to many issues beyond your control.
For these reasons lots of developers take advantage of a Developer Exit Loan. This is a loan designed to allow time and space for the sales to complete – anything up to 24 months. In the meantime you can have up to 75% of the market value of the properties in a loan which is repaid back when the properties sell.
When you consider the return on the money you can borrow from a completed build to use on new projects it makes sense to leverage cash to invest instead of being trapped in bricks and mortar which at this point is not an appreciating asset. Consider that the land and property value continually increase from point of purchase, through planning and build to Practical Completion but then stops when the ‘FOR SALE’ signs go up. Doesn’t it make sense to draw money to invest as long as you expect to make more return on the money from a new project? Yes, this is obvious.
Developer Exit Loans FAQ’s:
1. When can I apply?
Anytime near the end of the project, although completion (monies drawn) can’t happen until the Practical Completion Certificate (PCC) has been given.
2. How much can I borrow?
There are several lenders with similar products – generally its 75% loan of market value.
3. Is there a cost to apply for a developer exit loan?
Yes, you will need to budget for a valuation fee, legal fees and arrangement fee. The size of the fees depend on the size of the project. The arrangement fee is sometimes included in the loan and does not need paying upfront, usually this is added to the loan.
4. How long does it take to draw?
Generally, it takes 6-8 weeks to process, although we’ve completed cases successfully in less time.
5. What happens to the sale proceeds if I have multiple houses?
Typically, lenders want the first few properties sale proceeds paid back to them in full, then carry on until they are repaid in full. Alternatively, at a point comfortable with the lender they can be more flexible and take only a portion of the sales proceeds which in turn gives you more cashflow.
Even banks can be flexible, you just have to know which ones to use and that’s where Specialist Property Finance adds value to you.
6. What kind of interest rate is it?
Typically, the rates on Developer Exit Loans are between 0.43% – 0.8% per month depending on Lender, Loan to Value and Loan Amount. We work on your behalf to get you the best deal
7. What is the term?
From 1 month to 24 months. There are no penalties for early repayment and any unused funds are rebated. For example – say you borrowed £500k on a 12 month term at 0.5% interest per month. The loan costs are £2,500 per month for 12 months = £30,000. However, you sell all the houses within 3 months and pay off the loan so you get £22,500 rebated off the loan you redeem.
8. Could I change strategy and obtain a Buy To Let (BTL) mortgage at a better rate?
Yes, but be aware that if you change your strategy back to SALE & EXIT there will be an Early Redemption Charge (ERC). It can be very tempting to just sell the properties when you are faced with the additional workload of being a landlord as well as a property developer. Many a developer has done this in the past only to find a 3% or even a 5% ERC, when they received a BTL mortgage with a circa 5% interest rate and then decided to sell anyway.
The lenders frown upon this situation as they feel the borrower is obtaining a product for one purpose then executing another in full knowledge. If this happens it could cause future lending declines.
9. I’ve used a BTL before, why is it a bad idea to use this again?
A lot has changed in the BTL market these days and lenders calculate your loan given against what rental income is generated. Therefore unfortunately sometimes this doesn’t allow you to maximise against sales value (e.g. you may only get 56% rather than 75% LTV).
At Specialist Property Finance we navigate our clients through the financial minefield and advise on all aspects of funding including PG’s, ERC’s, Valuations, Short Term/Bridging finance, Developer Loans, Developer exit Loans, But to Let transfers, Interest Roll Ups, Rebate agreements, Interest Only and many more. There are numerous aspects to a property development project and many touch points where finance may be required or simply allows the developer to release equity to complete the job or for other projects.
We understand the market, our developer clients, the ever-evolving lending market, products and the rules associated with all of them. Use our expertise and skill set in this area to benefit your project.