Development Finance Cost.
The interest charged is not the only development finance cost. You also need to take into account various costs and fees. It should be noted that not every lender will charge every fee.
Arrangement Or Facility Fee.
Most lenders charge an arrangement fee of, typically, 1-2%. This is a one-off fee, normally added to the loan, calculated on the loan amount. It is only payable when you take the first draw down of funds.
Some brokers charge a fee in addition to the commission they receive from the lender. Some charge a minimum amount, others a percentage of the loan. Normally this would also be paid on completion, though some want a portion of it, at least, to start the main application process with you.
Sometimes charged by lenders, a commitment fee is charged before they start their full due diligence. As with any business, lenders have overheads, so they won’t start work unless they know their time and some hard costs will be compensated for if you decide to take finance for your build elsewhere. Depending on the lender and circumstance the fee may be non refundable.
An essential part of any loan process is the legal work that needs to be done. As the applicant, you will be responsible for the lender and your own legal costs. Depending on the lender their solicitor charges can vary quite wildly. Some lenders use in-house firms, others larger London practices that charge “London Prices”. The loan size and certain aspects of a loan application can also affect the cost.
Most solicitors will want an undertaking for their costs, so basically, you need to pay for their costs upfront. Like lenders, they want to be sure they are paid for their work in the event you decide not to proceed with their finance.
Although you can get a good idea of the value of a current site or the GDV from desktop research lenders will want a valuer to visit the site and give them a report as to their opinion. Lenders rely on this to make their lending decision so it’s a crucial part of the process.
The cost of this will be dependent on various factors including the expected end value and complexity of the report.
As with solicitors, you will pay this for them to do the work.
The lender will own the report, not you. So, you would need the lender to give permission for it to be used by another lender, which they are not obliged to give.
A lot of lenders will charge an admin fee as well as an arrangement fee. It would normally be added to the loan.
All lenders will want to monitor the build in some form or another. Some will want to use a valuer, some would use a Quantity Surveyor while others will use a building Engineer.
This would involve a site visit, which would be on a monthly basis or on a per draw down basis.
As with the valuation and solicitors, the cost of this may vary due to the complexity and size of the project.
An initial report would be carried out, as part of the due diligence, too at your cost.
Draw Down Fees.
Each time you approach the lender for the nexty draw down of funds it takes time to administer. The cost of this is charged by some lenders but not others.
Any costs of bank transfers would be added to the loan. Funds usually go from the lender to your solicitor via telegraphic transfer.
This is potentially a very large part of the overal cost of a development loan, so attention must be paid to how and what is charged.
They can be charged in various ways, the most common being:
- On Loan Balance – a percentage of the amount outstanding is charged.
- An Additional Month’s Interest
- Calculated On GDV – this is by far the most expensive.
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