Are development finance rates expensive?
That’s quite a difficult question to answer because like all things finance related, interest rates on a particular product are relative to other products within that sector.
For example, if you compare a development finance loan to a residential loan (one where you’ll be buying a house to live in for example), then yes development finance rates would seem expensive.
However everything needs to be taken in context and if you look at what development finance can actually do for a borrower and how risky it can potentially be for a lender, you will understand why it is priced more expensively the more traditional lending products, especially if you are considering 100% development finance.
There are certain lenders out there who will tell you that they can offer development finance rates conscious 0.4% per month, the reality is that you are unlikely to be able to obtain a rate at that level simply because that is what is known as a headline rate, lenders use this all the time to try and attract new customers and borrowers.
What you may find after you’ve applied, is that the lender will come back to you and tell you that for whatever reason, you are unable to secure the rate of 0.4% per month (noted above) and in fact your rate will be closer or even greater than 1% per month.
Look at the other fees that lenders charge
The other important thing to note is that those lenders who offer you what seems to be a very low headline interest rate, will often be the lenders that have the highest associated fees and this is typical of how development finance rates are calculated.
For example, they will have site visit fees, additional arrangement or administration fees, ongoing development monitoring fees (these will be in addition to the QS fees) and also fees for administering the staged drawdowns on the development.
It is a common trick employed by lots of lenders in the bridging loan, commercial mortgage and development finance sector and by the time you get to the end of your project and all of the fees and interest has been rolled up, it can be very expensive.
Do your research
When applying for development finance, make sure that you ask the lender in question for a breakdown of all the fees and charges, not only the charges for things like late payments or default fees after the loan has completed but before the loan has completed so you are fully aware in advance of everything that you should be paying.
Once you have all this information then you will be able to compare like with like when dealing with a lender. Here at anytypeofloan.co.uk we do all of this for you to ensure we find the most competitive deal for you and the one that meets your requirements.
However one final note of warning, a lot of the new lenders who have entered the market are offering what appears to be some of the cheapest development finance rates in the market. This is not uncommon, as lots of new lenders that enter a particular market will often come out with market leading interest rates, however in the development finance sector it’s important to understand if the lender has sufficient funding or capital to finish the build or development.
There will be nothing worse than a borrower starting a project that is being funded by a new lender only to find a that the lender comes back to them in six or seven months time and tells him that they have run out of funds to be able to provide them with the rest of the money to complete the build.
You will be left in limbo and will have to try and refinance your loan with another lender and the problem with this is, is that short and lenders or rather development finance lenders, don’t like having to step in and finance developments that were started by another lender, regardless of the circumstances surrounding it.
Key points to consider when searching for the best development finance rates
- Make sure you get a breakdown of all the associated costs and fees with the loan
- Ask for this information in writing
- Ask the lender for confirmation of how long these rates and fees will apply for
- Also ask the lender to itemise and break down the cost of third-party fees from the likes of Solicitors, valuers and the QS
- Most importantly of all, make sure you consider the total cost of borrowing money on your development finance loan and make sure you do not focus solely on the headline interest rate, because that is not a true indication of how much the loan is costing you