Did you Know?
It’s our firm belief and philosophy that we, as property development finance professionals working in the marketplace full-time, should pass on as much of our knowledge to property developers as possible.
Below are 9 insights that will help you get a handle on what’s going on, and act as a starting point for accessing your ideal finance partners quickly, painlessly and cost effectively.
1. What the High Street Banks Offer
The high street banks, whilst technically still offering competitive rates, provide by far the lowest leverage, require developers to put in the most cash into deals, require developers to already have cash in the bank on hold, and often do not cross-collateralise. They work with the greatest restrictions in the marketplace today.
2. There are Many Lenders
There are over 40 specialist development finance lenders in the UK, who offer senior debt or first charge lending. There are over 15 offering mezzanine finance, and over 15 offering equity or JV finance. The numbers in all 3 categories are growing year on year.
3. Product Offerings Regularly Change
It may come as a surprise as many think finance products are quite static. However, a quarter of the top 40 funders change some part of their proposition every 3 months. Lenders can be change any one of 15 parts of the product offering, which demonstrates the fluidity of the market.
4. Don’t Select Lenders By Interest Rate
The old way of selecting lenders by the cheapest interest rate does not guarantee you get the cheapest lender. It is now an outdated and very inaccurate practice. We discuss the various issues and mysteries of the interest rate in our free to download report below.
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5. Factor in the Fees
The cheapest looking lenders often have high exit fees or poor leverage. Some fees can account for as much as 40% of the overall finance cost, so make sure you account for the total cost of finance so you can compare the options effectively.
6. Interest Rate Calculations vary between Lenders
Competing Lenders with the same interest rate can be charging very different levels of actual interest due to how the interest rate is actually applied (3 different ways). You must drill down further to understand what the interest rate means in Pounds and Pence.
7. Leverage vs. Interest Rate
It can be cheaper to select a lender with a high LTV/GDV leverage than with the lowest interest rate due to the amount of capital you have to tie up.
8. Purchase Deposits vs. Interest Rate
For site purchases, it can be cheaper to select the lender who requires the lowest deposit, than the lender with the lowest interest rate.
9. Time is Money
A developer’s biggest leverage today for keeping costs down and improving profit is project timeframe. There are a number of ways you can cut down the timeframe, which are discusssed in our free to download report below.
Having an objective, honest and valuable insight into the whole marketplace is essential in order to make informed finance decisions. The banks rarely offer good products, the marketplace is now sizeable, it continues to grow, and product offerings change more regularly that one would think.
Different lenders use different models and approaches in order to calculate the finance they wish to provide. Developers are rarely informed of the differences, and what it means when comparing competing lenders.
Assessing lenders by top line numbers on term sheets such as interest rate and fees alone is extremely inaccurate, and likely to cost developers thousands in profit. By drilling down into the cloudy world of interest and the interest rate, it is possible to get a clearer view of what you’re being offered. This in turn will allow a developer a much better chance of making correct finance partner decisions.
Chris Davidson is Managing Director of Discover & Invest Ltd, a specialist development finance brokerage and operator of the Discover Development Finance website.
Chris believes in providing property developers with groundbreaking insights into the marketplace, that will allow developers to make better informed finance decisions, quickly, painlessly and cost effectively.
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