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There never has been and never will be a true one-size-fits-all development finance product. Each and every property development project is inherently unique. Development finance is therefore issued as a bespoke solution, with terms and conditions tailored to meet the requirements of each individual applicant.
The popularity of development finance is at an all-time high, as established investors look to capitalize on the UK’s buoyant housing sector. Even so, there are potential disadvantages to development finance, which must be taken into account.
Whether you are planning ahead or looking to obtain urgent funding for a time-critical investment opportunity, the following development finance drawbacks are worth bearing in mind:
Qualification Criteria
Most development finance specialists are only willing to work with experienced developers with an established track record. There is little to no room for newcomers at the proverbial inn, who may lack the necessary credentials to qualify.
Even with the track record needed to get your application through the door, your experience will play a major role in determining the cost-effectiveness of the facility you are offered. Development finance specialists reserve their best deals for applicants with established portfolios, while less experienced developers can expect to pay more for the same products.
Funds Released in Stages
Property development projects frequently hit snags, and delays cannot be ruled out of the equation. Unexpected issues can prove particularly problematic where projects are funded with development finance, which is released in stages in accordance with the project’s progress.
A surveyor appointed by the lender reports back to the loan issuer on a regular basis, outlining whether or not the project is on track as planned. Subsequent loan installments are only issued when the lender is satisfied that the current project phase has been completed successfully. Otherwise, they may withhold all future installments until adequate progress has been made.
Collateral Required
A high-value development finance loan inherently calls for collateral (security) of an equally high value. The more you borrow, the more you stand to lose if you are unable to repay the loan within the agreed timeframe. Use an online development finance calculator to work out if you can make the payments sufficiently or not.
As with all secured loans, it is essential to acknowledge and understand the risk you are taking by putting your assets on the line with development finance.
A Strictly Short-Term Facility
The fact that development finance loans are strictly short-term in nature gives developers comparatively little breathing room. Most development finance loans are designed to be repaid within 18 months, at which point the outstanding balance must be repaid in full.
Development finance can be a highly cost-effective facility, but only when repaid as promptly as possible. It is therefore essential to plan for all possible contingencies and to have a rock-solid exit strategy in place. Though in most instances, development finance will not be granted in the absence of a bulletproof exit strategy.
For more information on the potential benefits of development finance or to discuss your requirements in more detail, contact a member of the team at UK Property Finance today.
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