Funding construction projects
in the UK was never a simple enterprise and is getting harder. The inspection
from the lenders has intensified over the years, making it more time-consuming
and trickier than ever for construction projects to secure the funding they
need to grow. According to the Bank of England, lending to construction
projects has fallen by 30% in the last couple of years. High street banks are
often reluctant to co-operate or do not understand the constraints in the
construction industry work. But there is no need to worry. All is not lost, and
there are some really competitively priced alternatives to the high street
banks.
The following are the sources of funding
construction projects:
#1 Construction and Development
Loans
The construction and development loans in the
UK are typically short-term loans that can be used to pay for the cost of
architecture, such as a private home or building. Construction loans are
offered for a set term – say a year, to allow sufficient building time. Once
the construction process is completed, you will need a new loan to repay the
construction loan. This is also known as the ‘end loan.’
Hence, you need to refinance and enter into a
new loan that has a more conventional financing option for your completed
building like a 30-year fixed rate mortgage.
What
are the eligibility requirements for a construction loan?
Mortgage lenders and banks are often cautious
of allotting construction loans for several reasons. For starters, a lot of
conviction requires to be put in the contractor commencing the construction
project. The mortgage lender or the bank is lending money with the assumption
that the building that is to be constructed will have an absolute value when it
is finished.
For instance, if things go sideways – if
property values fall or the builder does a poor job, then it could possibly
turn out that the mortgage lender has made a poor investment choice and that
the building isn’t worth as much as the loan.
Therefore, to protect themselves from such
scenarios, banks and mortgage lenders impose strict qualifying requirements for
a construction loan. This may include the following criteria:
-
A large
down payment
Although 20% of the total loan
amount is required as down payment, some lenders and banks may charge as high
as 25%. This is done for the lender’s assurance that you have financed in the
project and will not simply abandon the project if things go south. This also
guards the lender in the event the building doesn’t turn out as much as
expected. If you have a positive credit rating, then you can easily qualify for
the construction loan. However, the lender or the bank will require information
about your income as well.
-
Building
value is estimated by an appraiser
While it is difficult to appraise
something that doesn’t even exist, the bank appoints an appraiser to evaluate
the value of the land and building specifications before funding construction
project. These estimations are then compared to other similar construction
projects with same size, features, and locations, with an evaluated value being
determined from these.
-
The lender
needs detailed specifications
The lender or the bank will require
details about the materials used and the floor plans. Hence, you need to put
together a comprehensive list of building specifications – everything from the
type of insulation to be used to the ceiling heights of the building.
-
The
involvement of a qualified builder
A builder, with a general
contractor licence and an established reputation for quality construction work,
is called a qualified builder.
With a construction loan, interest must be
paid on the money borrowed. The interest rates vary from lender to lender and
according to the market conditions.
Once you have been qualified for a
construction loan, the bank will start paying the money they agreed upon. A
schedule of draws is set up instead of providing all the money upfront.
#2 Mezzanine Finance
Mezzanine finance can be especially helpful
during economic hardships when lenders may take a more risk-averse stance in
relation to funding construction project. Mezzanine finance, unlike your
construction loan, provides a second layer of funding to bridge the gap between
the primary debt and your actual requirements.
It works in a way that the mezzanine lender
will only get paid after you have paid the debt of the senior lender, such as
the bank. Hence, mezzanine lenders are at higher risk than banks or mortgage
lenders.
#3
Private Developer Scheme
PDC or private developer scheme is a form of
public procurement in which construction of a building project is commenced and
funded by a private developer. However, the construction asset is occupied the
government who pays the rent for a certain term to the developer under a
leasehold agreement. PDS is a form of collaborating where public land is
transferred to a private developer.
#4 Asset Financing
Asset financing is a way to funding
construction projects where you can obtain the plant, equipment, or machinery
for your construction project. This type of funding is growing in popularity
due to its flexibility over traditional bank loans.
These are the top four ways to funding
construction projects in the United Kingdom. Before applying for a loan, it is
critical that you check your credentials. Factors like credit score, loan
repayment capacity, budget\, approvals and consents, land and site value,
building costs, etc. are considered by the lender before granting the funding
for your construction project.
0 comments :
Post a Comment