Development finance can be costly, especially on multi million pound projects.
The good news?
You don’t have to wait until your project is complete to reduce these costs.
Even small reductions in your interest rate could save thousands – we’re talking thousands of pounds a month on larger developments.
Current Development Finance Costs: What You’re Paying
First you need to understand what you’re paying now.
Let’s put this into real terms: If you have a £2 million development loan at 0.8% monthly interest you’re incurring £16,000 each month.
By restructuring to a lower rate of 0.54% you could save £5,200 a month.
Interest rates vary between lenders.
Some want monthly payments, others rolled up interest. This makes a big difference – on a £3 million loan at 0.89% monthly interest over 18 months rolling up the interest adds over £50,000 to your total compared to monthly payments.
Beyond interest you’re paying:
- Arrangement fees
- Monthly monitoring fees
- Legal and valuation costs
- Potential exit fees
When to Review Your Finance Costs
It could be a good time to review your borrowing when:
You’re ahead of schedule – this often means your risk profile has improved. We recently helped a client with a development loan reduce their rate by 0.3% monthly after they finished their structural phase early.
Property values in your area have increased since you took out your loan. This improved equity position could get you better terms.
Base rates have moved. If you arranged your finance when rates were higher you may have better options now.
The biggest opportunity comes when your build is near completion. At 90%+ complete you’ll find more lenders willing to offer competitive rates.
Development Exit Finance: Your Best Option for Cost Reduction
Development exit finance usually offers the biggest savings for projects near completion.
Here’s an example: One of our clients had a £5 million development loan at 0.89% monthly interest. By switching to development exit finance at 0.49% they saved £20,000 a month.
The benefits go beyond rate reduction:
- Reduced or released personal guarantees
- More time to achieve optimal sales prices
- Better cash flow for your next project
- Often no early repayment charges
Timing is everything with development exit finance. The sweet spot is usually when the project is around 90% complete when:
- Most construction risks are behind you
- You have a clear timeline to practical completion
- Sales or pre-sales are in progress
- Your exit strategy is defined
Other Ways to Reduce Your Finance Costs
While development exit finance usually offers the biggest savings, other options may be better for your situation.
Partial refinancing works for phased developments.
One of our clients recently refinanced 60% of their £6 million project (the completed section) at a lower rate and kept development finance on the remaining units.
Refinancing more expensive parts of your funding, like mezzanine finance, can give you big savings once you’ve built up equity in the project.
Strong pre-sales can help your position. We recently got a 0.2% monthly rate reduction for a developer who had buyers for 40% of their units.
Presenting to Lenders
Reducing your costs depends on good preparation. You’ll need to have:
- Development current status
- Completed milestone evidence
- Updated completion timelines
- Sales and marketing plans
Common Pitfalls
Be aware of these:
Always calculate the full cost of any change, including exit fees from your current lender. A lower interest rate might not save you as much money if you’re paying high fees to switch.
Get your timing right with valuations – an early valuation might undervalue your development and limit your options.
Know all the security requirements upfront. Some good rates come with additional security requirements that won’t work for you.
Expertise Makes a Difference
Working with experts in development finance can really open up your options.
At Bridging Finance London we have relationships with over 250 lenders, including private banks and specialist development finance providers.
Our experts can analyse your current situation and suggest practical and worthwhile ways of restructuring your development loans.
