Understanding regulated development finance

There are numerous reasons why someone might take out a development finance loan, but for many readers, the profile of the average borrower will look quite similar – property developers looking to build or renovate a property and sell it on for a profit, with the main difference being whether they are first-timers or more experienced. First-timers will require  ‘regulated development finance’ and more experienced developers will not require their development finance loan to be regulated.

While property development itself might be complicated, this suggests a relatively simple dynamic where prospective clients can seek out any of the wide range of development finance lenders, finding one that works for them and for which they fit the criteria.

However, a lesser discussed area – but one that is only likely to rise in importance as people look to take greater charge of their living spaces – is regulated development finance. This brings an element of complexity, as not all development finance lenders are regulated. It also caters for a tranche of borrowers who are, almost by definition, likely to be less experienced.

So, what is regulated development finance?  When does it come into play, and how can you get the best deal for those clients that might need it?

The basics

At its simplest, the term ‘regulated development finance’ applies when 40% or more of the property in question is to be used or has been used, or in connection with, the primary dwelling of the borrower. The client might still be looking to make a profit from selling on part of their development, but unlike standard developers, they are also planning to be an owner-occupier at the end of the project.

To illustrate, both regulated and non-regulated development borrowers might have bought a plot of land with a view to building on it, but if they are building at least in part for their own use, the loan will be regulated.

Other examples might include developing a property in the garden or grounds of a residential home, in order to sell one on while remaining in the other. The borrower might also have no view to selling on at the end, and instead simply be developing a property entirely for their own use.

Why development?

Most of the time, when we think about a client making changes to their own property, the first type of finance to spring to mind is light refurbishment or heavy refurb for the more ambitious projects. In the majority of instances, one of these products will apply, which is perhaps one of the reasons that regulated development is less well-known. The difference here is relatively simple, as development finance comes into play when a project is ground-up – building new properties either on unused land or by tearing down existing structures.

However, when a client is looking to build their own property, most would think of self-build mortgages before development finance, and the difference here is a little more complex.

Self-build mortgages are a good option for many clients, but the trade-off here, though, is that terms and criteria tend to be restrictive. In addition, self-build mortgages are not suitable for those with an imminent change in circumstances and can cause problems with cash flow, as the borrower is expected to pay the interest monthly during the build, whereas it can be rolled up for development loans.

The other key difference between a self-build and a regulated development project is the type of build itself. A ground-up build intended to be occupied entirely by the borrower might be a straightforward self-build, but when the security becomes more complex – for example, if it includes a property to be sold at the end of the project – then self-build mortgages are off the table.

The right partner

While your owner-occupier clients may often fall into the categories of heavy refurb or self-build, there will be those who do not fit. It is important, then, to understand the nuances and benefits of using regulated development finance to ensure your client is considering all their options, and to partner with the right lender.

At Alternative Bridging Corporation, our 30 years of operation in this market makes us a vital and experienced partner for regulated development. We are willing to lend up to 100% of build costs, at market-leading interest rates, from £500,000 with no defined maximum loan. Our deep-running expertise and prior experience also allows us to take a common sense, case-by-case approach.

The aftermath of the Covid-19 pandemic means an increasing number of people are looking at their properties and considering how to turn them into dream homes. Combined with high house prices and soaring demand in the face of supply issues, now might be the perfect time for a savvy borrower to develop their land to both live on and profit off. Partnering with the right lender, with a proven track record and decades of experience, could make these dream projects a reality.

Click here to read the article on Financial Reporter.