Most development finance loans are issued over terms of 6 to 24 months. A strictly short-term facility, prompt repayment of a development finance loan is essential, in order to avoid additional fees and penalties.
In order to qualify for development finance, applicants must present clear and convincing evidence of a viable exit strategy. This provides the loan’s issuer with an overview of when and how the borrower intends to repay the loan in full.
For example, the borrower may intend to sell their investment property after renovating it, and to use the funds raised to repay their loan. Elsewhere, an investor may intend to retain the property long-term and arrange to transition the development finance loan to a longer-term repayment facility at the end of the initial term.
With the latter of the two options, bridge-to-let is a popular choice. This is where both loans are arranged simultaneously with the same lender – an initial development finance loan (or bridging loan) to cover the costs of the project, followed by a longer-term repayment loan (similar to a mortgage).
However, there will always be instances where investors reconsider their options at a fairly late stage. Likewise, it is not uncommon for the planned sale of a property or development to fall through at the last moment.
Even the most robust exit strategy is not 100% bulletproof. The question is, what can investors do to avoid potentially high fees and penalties, if they are unable to repay their development finance loan on time?
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Development Exit Finance
In times of unprecedented economic uncertainty, the above scenario is anything but uncommon. It is also where development exit finance can offer a welcome lifeline to investors as a flexible and affordable alternative to defaulting on a loan.
Development exit finance is essentially a ‘top-up’ bridging loan, enabling developers to repay development finance loans before their agreed deadlines. Where it becomes apparent that a planned exit strategy is in jeopardy, development exit finance can be taken out to ensure the loan is repaid on time.
In some instances, development finance providers may agree to extend the term of a loan, without imposing additional fees or penalties. But where this is not an option, development exit finance is available.
Issued in the form of a short-term bridging loan, development exit finance can be arranged and accessed within a few working days. The funds are secured against the property/development in the same way as the development finance loan, and can be used to repay the facility in full.
After which, the development exit loan is repaid several months later, giving the developer as much breathing room as they need. During this time, they can either find a viable buyer for their development, or arrange a longer-term repayment facility if they wish to retain ownership.
Typically charged at a rate of around 0.5% per month or less, development exit finance can be a cost-effective facility when repaid promptly.
What is the Maximum Loan to Value for Development Exit Finance?
All lenders have their own unique policies, in terms of maximum loan values. Most development exit finance specialists will issue loans up to a maximum LTV of 80%. However, it may be possible to arrange a loan with an LTV of 90% or even 100%, in special circumstances.
How Quickly Can Development Exit Finance Be Arranged?
With all the essential paperwork and documentation in place, it is possible to arrange a development exit finance loan within a few working days. Even so, it is inadvisable to wait until the last minute to apply, as there may be inevitable delays or disruptions along the way.
What is the Maximum Term for Development Exit Finance?
This again differs significantly from one lender to the next, as all agreements are personalised to suit the unique requirements of the borrower. As a general rule of thumb, most development exit finance loans must be repaid within 12 months.
What Are the Most Essential Development Exit Funding Criteria?
Eligibility requirements for development exit funding typically include the following:
- All contractors and contributors should have been paid
- The development must have reached practical completion
- Properties should be actively marketed
- Building regulations signed off and warranties in place
- All planning conditions discharged
- Red book valuation for the completed development site
In addition, the extent to which you have any other loans or debts secured against the development will be taken into account.
For more information on any of the above or to discuss the benefits of development exit finance in more detail, contact a member of the team at UK Property Finance today.