Development Finance

What is development finance? Development finance is when a borrower receives funding for comprehensive renovations or building projects.

This could include anything from luxury homes and housing estates, to office blocks that will be converted into apartments. This type of funding is not limited to one type of property; it can be for commercial or residential. However, development finance is generally used for larger scale properties and projects, as opposed to single houses or apartments.

Commercial vs. residential development finance

Are you trying to figure out whether you need commercial development finance or residential development finance? Usually the type and amount of property/ies being built can help you determine this. Residential lending tends to cover properties of five or less dwellings and has a simpler application process. However, if your development project is larger, it will typically fall into the commercial lending category.

What differences can you expect?

Commercial development finance require significantly more paperwork and encompass different loan features to residential development finance. In addition to meeting the standard criteria for residential development finance, banks require much more information for commercial loans as they take a much more conservative approach. Generally, commercial development loans also pay higher interest rates and have a different fee structure.

Development finance interest rates

Generally, there are no set interest rates for development loans, so using a MortgageWorks Broker will help you find the best outcome in the market. Lenders providing a loan and an interest rate, will assess each application, determining the strength of the proposition and the financial track record of the borrower. This is how lenders determine an appropriate interest rate and structure.

Does development finance allow you to borrow 100%?

The general answer is yes. However, in order to ensure you can borrow 100% of the property value , you’ll need to provide extra security—typically in the form of another property or land. This can be an investment property, land that can be used for development in the future, or your own residential property.

Tell me about LVR

Put simply, loan-to-value ratio (LVR) is the percentage amount you can borrow compared to the value of the property you are buying. This means that if your LVR is 75%, you’ll need to find a deposit of 25%. But the important thing to remember is that a larger deposit equals a higher LVR, which means you could negotiate a better interest rate on your development loan.

Is development finance different from construction finance?

Although you may notice similarities between residential development finance and construction finance, these two loans are actually very different. The general rule of thumb is that construction finance are suitable for building single houses or investment properties, while  development finance are usually for multiple properties (usually five or more) that are being built or redeveloped.

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