The amount a lender will be prepared to lend will be based on the gross development value (GDV) of a project, this is the estimated value of the development upon completion.
Ultimately this will allow your lender to assess the viability of the project and decide on the loan amount, with many lenders rejecting applications if the total costs of the project exceed 75% of the GDV.
The minimum loan amount varies from lender to lender, with some lending from £50,000 and others only offering their best interest rates for deals over £500,000.
Once finance has been agreed, the lender will release an initial percentage of the loan, with further funds being released at intervals.
The lender will normally re-inspect the development before further funds are released. They will want to ensure that there is sufficient value in the site.
The average term for development finance is currently 6 to 18 months, with a small number of lenders willing to offer terms over 24 months.
Interest is retained by the lender, so unlike a traditional loan, there are no monthly repayments. Instead, the interest is added to the loan value and redeemed when the development has been completed.
When funds are being released at intervals, interest will only be applied to the funds that have been released.
There is normally an agreed grace period to allow time for the property to be sold or refinanced once the development has been completed.
For developments of more than one unit, it is important to discuss how the loan will be repaid with the lender as it is unlikely all units will sell on the same day. Some lenders will allow you to repay the loan in stages.