There is a little known tiered lending market for property developers in the UK. It is therefore important to know which tier you are in and if you should be looking move tiers.
Visually the tiers look like a pyramid with the lowest cost providers at the top and the highest cost providers at the bottom level.
Each of the providers within each tier offers different levels of finance costs and also service provision.
- The retail banks generally offer the most attractive rates but their appetite is generally limited to only supporting well established developers who undertake sizeable projects and even with them their level of support can be very conservative.
- The challenger banks in tier 1 are lesser known but within the small to medium size building firms they are an essential source of low cost fast acting development funding. They are classed as ‘challenger’ because they challenge the status quo of retail banks and operate a much more agile and effective service. The cost of finance is higher than retail but is still competitive and works very well for the vast majority of small to medium size developers. Rates vary from lender to lender but it is typical to see 6% – 10% per annum with an arrangement fee and no exit fee costs.
- There are some Specialist Development Funders or Challenger Banks in tier 2 who may offer a further layer of flexibility. For example some lenders in this tier don’t rely on independent site valuations – they just need to meet the developer and see the site. If they are satisfied with the developers experience and ability to deliver the project they will lend and will often provide 100% of the build out costs. The rates are higher than tier 1 lenders but the lender will often be providing a higher debt level thereby taking on a higher level of risk which means a higher rate and finance cost is justified. Rates vary from lender to lender but it is typical to see 1% – 1.3% per month interest on borrowed funds. There will also be an arrangement fee and some lenders also charge an exit fee.
- Private and Joint Venture funders are equity providers and will seek a profit share from the project. They only come into play where the borrower has limited capital to the extent that, even with Tier 2 Challenger Bank funding, the project is not financially viable without this type of funder. Many borrowers undertake their first project on this basis because it is the only way they can get onto the “property development ladder”. However, for most, this is only a means to an end, that being to self-fund the next project using an appropriate debt funder.
Access to funds is an opportunity cost you can leverage at various points of your build which you can use to displace expensive funding. When you have a finished plot and can obtain a valuation lenders will allow you to borrow against the value as its now tangible. You can use these funds to swap expensive debt to lower cost debt and increase your profits, in addition you may use the excess funds for your next development. You should also consider part exchange finance which funds you to buy your customers house in part exchange for the new build plot. This is a further opportunity to make additional profits on a quick and easy property flip.
We offer a free consultation to assess your current lending service and inform you where you currently sit within the lending tier system and what you can / need to do in order to move up.