The concept of property finance is not new. It has existed for as long as people have wanted to buy property, but struggled to pay the asking price in cash.
Property development finance as it is popularly called refers to short term loans taken for residential property developments. These developmental projects include but are not limited to construction projects and housing developments and is usually used as a loan towards the cost of land purchase or as a way of covering the development costs of converting properties to sell on, or lease.
Various types of property finance exist for those intending to use the property they develop or build as an investment and a source of revenue.
However, before choosing a property finance plan, it is important to carry out research to ensure that whatever package you decide on suits your needs and goals. The interest rate you end up with, loan amount offered, and the possibility of being accepted are largely dependent on selecting the right package with the right provider.
The different property development finance plans include:
- Bridging Loans
These are short term financial arrangements which help borrowers “bridge the gap” in a property purchase. For instance, bridging loans are best suited for those who intend to acquire new property before completing the sale on another. Rather than having to give up on the second property, you can apply for a bridging loan to cover the cost of acquiring the new property.
Once the sale of the first property is completed, the funds acquired are used in settling the loan taken for the second property. This way, funds are made available for new projects while those of old projects are still being processed. Bridging loans, however, have a higher interest rate than mortgages taken out on properties.
- Development and Refurbishment Finance
This finance is largely suitable for developers in the process of developing new sites and also for those looking to renovate old properties. While this property finance plan has a higher rate of interest when compared to others, it should be noted that the money received is intended to be used to develop the property and increase its value which in turn more than pays off the loan over time.
Property refurbishments and improvement often increase the value of the property by over 20%. This projected return on investment is considered by the lender when processing the loan application.
- Self-build Finance
This differs from other property finance plans in the sense that as the property would be the main residence of the loan applicant, this finance is deemed a “regulated mortgage contract” meaning that the loan provided resembles a normal mortgage. This finance holds fewer risks to parties involved because the funds are given in installments rather than in one lump sum. Also, repayment is in stages, making it easy for the borrower to manage.
How Property Finance Works
Property finance resembles a term loan, the only difference being that its maximum duration is 10 years. The property belongs to the lender until the loan is fully settled. After settlement, the title deed is then transferred to the name of the borrower.
While a building can provide collateral, a deposit is often required. The deposit is dependent on the type and value of the property. The lenders also check personal and business credit ratings. Bad credit results in loan applications being denied.
3 Steps to Climbing the Property Investment Ladder
The buoyant housing market, as well as the increased cost of living, has made property investment even more challenging of late. Many have become convinced that they will never be able to own a property. However, the good news is that the following key steps can help you get your foot on the property ladder.
- Consult a Financial Planner
Property investment is a long term commitment, and you must therefore make sure you are adequately prepared to take on such a commitment. Once a property has been decided on, the next step is to seek professional financial advice. A good financial advisor will help in saving you a great deal of time as well as avoiding excess costs and mistakes made by many inexperienced property owners. The financial advisor critically assesses your budget and helps you draw up strategies that aid you in maximizing your income, thereby securing your future.
- A Proper Savings Plan
Saving up to pay for the deposit on a house is an unachievable and unrealistic dream for many people without any form of reliable, calculated savings plan. A plan developed alongside your financial advisor allows you to build a nest egg while at the same time not sacrificing your quality of living.
A proper savings plan ensures that you are adequately prepared to take on property investment and can still maintain and manage such investments in the long run. Hence rather than just buying a property and having to let go of it at the end, there is a solid foundation built that will ensure your progress up the property ladder.
While seeking help and advice from property owners and financial consultants is definitely advised, it is also essential that you have a basic foundation education in how the property market works, for yourself. It is important to research interest areas to have an understanding of market values. Go through property listings even before you are ready to buy to have a solid idea of budget expectations and options available. That way, rather than attending open houses and falling in love with a property that you have no hope of being able to afford once the bidding war starts, you have an idea of what you want and what will fit with your financial plans and goals.
Speak to a Mortgage Broker about the mortgage options available and the ones that might best suit your needs. Property investment involves a great deal of financial preparation before it should be undertaken. This way, you are adequately prepared for property ownership and can work towards securing your dream property in a sustainable way.