Since the interest rate rises, you might have heard more and more about development exit finance. But what is it and why has it become more popular?
What is development exit finance?
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 0.6% per month. Usually, the lender takes a first charge over the asset and is repaid when the units are sold. Essentially, exit finance is a bridging product for schemes that have reached practical completion.
Why use it?
There are several reasons to use development exit finance. You might use it to free up capital, so as not to miss out on an opportunity in the market. You could also use it to refinance because it is cheaper than standard development finance, which can come with rates of up to 0.9% per month. Or, if you’re coming to the end of your loan term with your existing lender, you could use it to repay your senior debt (if you’ve completed enough of your development).
Why has it become so popular?
With all the volatility in the housing sector and increasing interest rates, completed housing stock is taking longer to sell. This will result in more developers requiring short-term exit finance to take out senior lenders on terms that are about to expire. But if you do seek 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, while others use vague terms like “substantially complete”.
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