Getting started with property development? Here, we’ll share the key information you need to know to help you prepare and how you can finance projects under £1m to build up your portfolio.
If you’re considering your first property development project and need funding under £1m, there are some key things lenders will expect. Understanding these requirements upfront can save time and help you secure the right finance.
In this blog, we’ll cover:
- The importance of a good contractor
- What you’ll need to provide in your application
- How much you can borrow
- The typical rates and fees to expect
What do lenders look for in first-time developers?
Lenders want assurance that you can deliver your project on time and within budget. One of the first things they’ll check is who will be undertaking the work, so finding the right contractor is key. Your contractor’s experience matters, as evidence of previous successful projects will give your lender confidence in your application. This could include:
- Examples of previous projects
- References or testimonials
- Proof of relevant qualifications and insurance
What Documentation Will I Need?
When applying for development finance, lenders expect a detailed set of documents to assess the risk involved and the viability of your project. Having the following prepared could speed up the application process, but also demonstrate your professionalism:
- Full schedule of costs – This should be a comprehensive breakdown of all your anticipated expenses, including materials, labour, and a contingency allowance (typically 5-10% of the build costs for any unexpected charges). Lenders and valuers verify these figures to ensure they are realistic
- Planning permission documentation – Having full planning approval is essential before the finance can be secured
- Project timeline – This should be a realistic schedule of works, showing key milestones and completion dates
- Valuation reports – While your lender will arrange these, having initial estimates can help speed up the process
How big should my first development be?
As a first-time developer looking for projects under £1m, lenders will expect you to start small. This typically means up to 1-2 units rather than a large-scale development of multi-unit properties or multiple dwellings.
Starting small, such as with a modest ground-up development, demonstrates to lenders that you can effectively manage costs, timelines, and risks. Once you’ve completed a smaller-scale project, you’ll be in a stronger position to take on larger developments.
How much can I borrow for my first project?
Most lenders offer up to 60% of the land's gross value and 100% of the build costs. This structure is designed to provide you with sufficient funding while keeping the lender’s risk manageable.
When will I receive the funds?
Development finance is typically structured so that the payments for build costs are made in arrears. This means the lender will release funds only after work has been completed and verified by a surveyor.
Consequently, you’ll need enough funds to get the project off the ground and cover early costs like site preparation, any labour, and materials before the lender reimburses you. The funds are then released in stages based on your progress.
As payments are made retrospectively, planning for cash flow is essential and highlights the importance of creating a well-thought-out schedule of costs before you get started.
Do I need planning permission before applying?
Yes, having planning permission in place before you apply for finance is non-negotiable. Without it, lenders won’t proceed because it adds too much risk, so ensure this is secured before you start your finance application.
What are the typical rates and fees?
Typically, expect rates of around 1% per month. Interest is only charged on the funds you’ve drawn down, not the entire loan amount (unless agreed otherwise). While the rates seem low, the overall cost can soon add up if your project overruns the expected timeline.
Other fees to factor into your budget include:
- Arrangement fees – Typically 2% of the total loan amount, which is usually deducted from the initial drawdown of the loan
- Exit fees – Some lenders apply an Early Repayment Charge (ERC) when the loan is repaid, which is typically 1% of the loan amount or a percentage of the Gross Development Value (GDV)
- Valuation fees – For assessing land and the build costs
- Legal fees – You will have to budget for both your own and your lender’s legal fees
- Monitoring surveyor fees – These costs are incurred for inspections before releasing funds
Can I Borrow More If My Budget Falls Short?
Running out of funds mid-project is a common concern for first-time developers, but if your initial budget isn’t enough, some lenders offer the option of “Make weight” security or a second charge. In this instance, your lender may increase your borrowing limit with the added security of a second charge on another property. This could be your home or investment properties in your portfolio.
How to get started with your first development finance project
The right preparation and support are key to a successful first development project.
Having an experienced broker on side who understands the process and the complex development finance market is essential. We can answer any questions and find the right lender for your personal needs and project goals.
Speak to one of our experts
If you’d like to discuss your commercial or development finance options, call our team of experts on 0345 345 6788 or submit an enquiry here.
