Since the Bank of England began to increase interest rates in 2022, more and more property developers have begun to use development exit finance. So, what is it and why has it become so popular?
Development exit finance is debt secured against a substantially finished development. Lenders offering it will provide leverage of between 70% and 80% LTV, at rates starting from approximately 0.8% per month. Usually, the lender takes a first charge over the asset and is repaid when the units are sold.
In other words, exit finance is a bridging product for completed or near completed schemes.
Why use development exit finance?
Here are some reasons to use exit finance:
- Releasing equity from your scheme, to use for new acquisitions
- Refinancing your senior loan to benefit from a lower interest rate (standard development finance products can come with rates of upwards of 1% per month)
- Refinancing your senior loan to repay your lender, if you’ve reached the end of your loan term
Why has it become so popular?
With increasing interest rates and suppressed demand from house buyers, completed housing stock is taking longer to sell. This has resulted in more developers requiring short-term exit finance to pay back senior lenders before their loans expire. Terms for exit loans usually range from 6 to 12 months, depending on how many units the borrower still needs to sell.
If you’re looking for development exit finance, you should be aware that different lenders have different criteria. For example, some will only offer 70-80% of the value of units that are practically complete.
Others will lend against units that are nearly finished, which might mean that they’re wind and water tight or that less than 10% of construction costs need to be covered. Loans for developments that are nearly finished are sometimes called ‘part-complete’ or ‘finish and exit’ loans.
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