Using development finance facilities will incur a number of different costs. The headline rate that most investors and developers look for is the “headline rate”, which is normally expressed as a monthly interest rate. These rates will normally be higher than a normal mortgage, therefore development finance should normally be considered as a short term funding option.
There are also a number of other costs which need to be considered, as they can be expensive. The best way to properly evaluate different bridging loans is to take account of all of the costs and fees, over the proposed term, then you will have a true cost of the bridging facility. Here we have outlined some of the costs and fees that you need to consider:
- Interest – interest for a development facility can either be paid during the term of the loan or alternatively, and more popularly the interest can be rolled up. This means that no interest payments are required during the term of the loan and the outstanding balance for the development finance facility will be repaid on refinance or sale of the asset.
- Facility Fee – this is the lenders arrangement fees. Development Finance Facility Fees fees vary depending on the lender and can range from 1-3%. Most lenders will allow the fee to be added on to the finance costs and therefore will be included in the loan facility.
- Exit Fee – some development finance lenders charge an exit fee, which is calculated as a % on the value of the loan at the point of exit.
- Legal Fees – when taking a development finance loan you will be required to cover the costs of both your legal costs and the lenders legal costs, these costs can vary, so it is important to consider these are part of your quotation comparison.
- Administration Fees – most lenders include a small administration fee on drawdown, this can range from £0 to £750, however can be higher.
- Valuation Fees – A lender will normally require a surveyor to visit a property which they are considering financing. This survey is paid for by the borrower and carried out on behalf of the lender. Valuation costs can vary depending on the type of property which is being financed.
- Monitoring surveyor – development finance facilities will normally require a monitoring surveyor who will approve further drawdowns of the facility as the development progresses. The monitoring surveyor will normally get paid on a monthly retainer, with rates to be agreed between the lender and surveyor.
- Default interest rate – Standard terms for development finance lenders are that if the borrower does not refinance or repay the bridging loan facility during the set term, then a default interest rate will apply. The default interest rate is normally higher than the normal interest rate. It is important to consider the costs of these default rates as they can be punitive to borrowers.
- Broker fees – some brokers charge broker fees on development finance loans, these can range from £0 to a % of the loan amount.
