Development Finance

About Development Finance

Have you heard the saying "no money, no project" before? That is the harsh reality of the real estate sector. Many developers need to be more informed about a project's potential. They somewhat fail to set the project in motion because they erroneously predict how simple it will be to get infrastructure development finance. The truth is that receiving funding for a project can be simple if you know which financial products (property development finance) are best for your project, the specific lenders offering them, and how to approach them with your deals.

All of these topics related to acquiring financing for property development will be covered in this blog. Your knowledge of finance is essential because if you make inaccurate assumptions about who will finance your project and how you could commit to purchasing a project site, that will burn holes in your pocket. However, higher interest rates and fees will significantly lower your projected return. 

What is Infrastructure Development Finance?

Development finance is money allocated for significant upgrades or brand-new construction projects. To start a housing project, developers can secure residential development finance, and if the development is associated with a community, then the developer can rely on community development finance. These kinds of projects include mansions, estates, and office buildings that will be turned into apartments. Residential, commercial, and mixed-use sites are all eligible for infrastructure development finance. However, developers can't use development finance for smaller-scale projects, i.e. projects in which developers renovate a home and "flip" it for a profit.

Lending Criteria for Development Finance

Generally, the Infrastructure Development Finance Company has set eligibility criteria based upon which the application is either approved or rejected. A developer must get acquainted with the eligibility criteria to secure development finance without interruptions.

• Loan terms for development finance usually extend to 2 years.
• At a minimum, a developer can secure a size of $30,000, although there is no maximum limit.
• For residential projects, developers can get 70 to 80% of the building costs, whereas for commercial projects, this percentage can go up to 85%.
• Infrastructure development finance is available at a fixed interest rate starting from 4.55 based on the loan amount. 
• A lender arrangement fee between 1% to 2% of the approved loan amount.
• Lenders generally don't charge a foreclosure or exit fee, but if the LTV ratio is high, you might have to bear foreclosure charges.
• Funds are released based on the cash flow requirements.
• A designated person from the Infrastructure Development Finance Company will visit the site and inspect the same to understand the submitted plans and profitability. 
• An evaluation will be made to decode the project's Gross Development Value.

If all these pointers match perfectly, the lender will sanction the development finance, and the developer can take the project off the ground.

Development Finance Interest Rates

The development finance interest rates are rooted in the borrowed amount, the developer's experience within the field, the site location, and the Gross Development Value (GDV) percentage.

The lender determines the offered interest rates based on the loan value. Here are the interest rates you might have to bear per the borrowed loan amount.

For Infrastructure Development Finance below $500,000

When the developer secures a loan of less than $500,000, he might have to pay higher interest rates. The key reason behind the hiked interest rate will be the work required to manage the project. This significant amount can be secured at 6.5% per annum. Additionally, lenders provide the combination of this amount and interest rates only to experienced property developers as the involved risk is relatively low. At maximum, the interest rates can go up to 9% per annum.

For Infrastructure Development Finance above $500,000

Typically, lenders offer development finance of an amount above s $500,000 only to experienced developers having a loan to Gross Development Value below 70%. The developers will be charged with an interest rate ranging between 4.5% to 6.5% per annum. Additionally, offered interest rates are subject to demand as well as the quality of the scheme.

Lenders usually charge 85% per month for smaller risk development loans, whereas for higher risks, the rate clocks at 1.35%. It equates to 10.2% to 16.2% annual interest rates. Commonly, experienced developers get infrastructure finance at 6.5% to 7.5%.

Lenders consider several factors while determining the property development finance rate, including:

• Loan amount
• LTGDV or LTC of the chosen scheme
• The overall experience of the developer
• Credit history
• Site location or the location of the scheme.

Things to Consider While Applying for Infrastructure Development Finance

There are several things a developer should consider before applying for infrastructure development finance. Being familiar with these pointers helps the developer hunt down the best financial product for the project's development regardless of its type, i.e. residential or commercial development finance.

Type of Development Finance and Loan Term

The lender provides several types of development finance, i.e. interest-only or draw-down facilities. The loan term usually ranges between 6 months to 18 months, based on the loan amount and type of development project. Generally, lenders capitalise on the interest within the project's development period, and the entire loan amount includes the interest component. The borrower must pay the charged interest when selling out the project. The rolling down of interest caters to the elimination of monthly payments.

Development Finance Interest Rate

The next crucial thing the borrower must consider is the interest rate. There are no set interest rates for infrastructure development finance, as they are subject to the loan amount, GDV, and site location. Thus, getting in touch with a commercial broker is recommended to understand the rates you might have to pay to borrow the required amount.

It will also help you compare lenders and unlock the best deals.

Planning

Before you reach out to any lender and apply for development finance, prepare the consent form and the associated documentation. Lenders typically rely on the planning consent and the documentation to approve or reject the application. Thus preparing the requisite things beforehand will escalate the entire process. Until and unless you are a highly experienced developer and have completed an array of projects, you won't be able to get the required funding without planning consent.

Documents Required for Development Finance

Lenders usually ask for a specific set of documents to determine the eligibility and credibility of the borrowers. Here's the list of documents you must prepare beforehand while applying for development finance:

• Details of the project plan, its drawings and associated permissions
• A complete breakdown of costs
• Details enlisted to your development experience
• The work schedule is broken down into stages
• Information of involved team members, including architects and contractors
• ALIE summary: Asset, Liability, Income, Expenditure 
• Proposed GDV (Gross Development Value)
• Residence proof
• Identity Proof

Note: In addition to these primary documents, you might need to submit some additional documents as per the lender's requirement.

What are the Benefits of Development Finance?

When you apply for development finance to cope with the fund required to complete your residential or commercial project, you unlock the door to the following benefits:

• Quick access to finance to complete the development of the dedicated project
• Short repayment terms of up to 24 months for rapid loan closure.
• Roll up interest facility, i.e. pay interest and capital component in a single payment at the end of the repayment tenure. 
• Elimination of monthly payments
• Low interest rates as compared to other similar financial products
• Opportunity to get started with large and ambitious projects 
• It is available for various realty projects, including commercial, residential and community projects.

Sometimes getting a mortgage for the property becomes next to impossible; that is where development finance comes in. You can now get quick access to funds through infrastructure development finance and complete your project without interruptions. 

How Does Development Finance Affect your Finances?

A borrower's credit score and level of debt are both impacted by development finance. Every time a borrower applies, the lender with whom they have applied for infrastructure development finance will run a credit check on them. Every time someone's credit is checked, a "hard inquiry" is recorded on their credit report, perhaps decreasing their credit score. This impact cannot be avoided as it is an essential step in processing the loan application. However, making several credit applications will damage the credit score.

Why is Development Finance Comparison Important?

Comparing financial products before selecting the final one is crucial because it helps you to crack the best deal. You can make more informed decisions and secure development finance at an affordable interest rate. In addition to getting a better deal, you will be able to understand what associated costs you will have to pay and which lender asks for lesser processing charges with better repayment terms. 

Compare Development Finance in Australia

To make comparing lenders an easy deal for you, we have curated the list of the top development finance providers. The comparison is based on the offered interest rate, comparison rate and monthly repayments.

This comparison is made for a loan amount of $500,000 with 80% LVR.

Lender	Interest Rate	Comparison Rate	Monthly Payment
IMB Bank	4.49%	4.50%	$2,530.46
Unity Bank	4.79%	4.79%	$2,620.31
Queensland Country Bank	4.69%	5.03%	$2,590.19
Macquarie Bank	4.59%	4.61%	$2,560.24

 

How to Apply for Development Finance?

With Urban Money Oceania, applying for development finance has become easier than ever. All you have to do is enter specific details such as loan amount, rate and term. You will get the list of lenders best fitting your requirement based on the input. Choose the lender and submit your loan application along with a few documents. The dedicated person will get in touch with you in the minimum possible time to guide you through the entire procedure and process your loan application.