How Mortgage Brokers Can Help Property Developers Get Funding

Challenges when seeking development finance

Although property development has a greater potential for financial rewards compared to traditional property investing, many property developers will attest that obtaining finance for a development can be extremely difficult.

Typically, banks will want to establish that the developer will have the means to make monthly repayments on a loan. This can prove difficult for developers because their cashflow is usually very lumpy, with large payments required upfront and no incoming funds until the end of the project. Because banks have such a focus on ‘serviceability’, more often than not the developer is going to get ‘declined’ stamped on their loan application.

Better Options for Property Developers

The good news for developers looking for funding for their project is that their options are not just limited to bank financing. There are plenty of alternative ways to access finance from a plethora of private lenders.

If a property developer client is unable to qualify for a traditional bank loan, your job as a mortgage broker is to present other lending opportunities to allow them to reach their financial goals. After all, without funding, there’ll be no development project. Hence, it is advantageous for a mortgage broker to work with private lenders and increase the possibility of finding a finance solution for their clients.

Misconceptions about private business loans

In many cases, many borrowers don’t quite understand what private mortgages are all about. Some erroneously think private loans are merely for smaller loans like a payday loan or a quick cash loan.

Others dismiss private loans because they assume interest rates are higher, and therefore conclude that they’ll be spending more compared to a traditional bank loan.

Advantages of private mortgages for development finance needs

The reality, however, is very different from these assumptions. For instance, most private development loans have terms of just 6 – 12 months which is perfect for a developer looking to finish a project, sell, and make a healthy profit. Even with higher interest, the short-term nature of the loan makes financial sense for developers who have a lot to gain at the completion of the project.

There are other benefits to private mortgages for those seeking development or construction finance. Because private lenders are more focused on exit strategy, rather than gathering endless paperwork to prove serviceability, the approval process is much faster than banks. This is hugely beneficial to developers who have found the perfect site for a project and need to settle fast in order to secure the deal. At Private Mortgages Australia, for instance, settlement can be done within 5 business days upon receipt of all outstanding information.

Moreover, most of the time banks will require pre-sales before approving a loan. Unfortunately, not all developers want to go down the pre-sales path because it would mean selling at a lower price than they could sell units after the development project is complete.

Private lenders, on the other hand, often don’t require pre-sales, so a developer can benefit from selling based on the full value of a completed project.

What this means for mortgage brokers

Working with a private lender can help increase the lending solutions you may present to your client. There may be times when your property developer client might not meet the rigid serviceability requirements of traditional finance companies like banks, so having access to private lending solutions can be valuable in closing more lending opportunities for you and better serving your clients.

Private development loans are often more flexible, and can be tailored to the specific needs of your clients. As a mortgage broker, it’s advantageous to have these alternative solutions at your disposal.

Sample lending scenario

As is usually the case, a property developer may need up to 3 different loans for one development project. The first is acquiring a development loan to cover for the purchase, application and pre-construction costs.

Once that’s out of the way, the next step is in acquiring a construction loan to cover the actual building costs.

If after the project, the property developer wants to retain ownership of the completed development project, the borrower will then need to pay out the existing loans by refinancing the property and then taking out an investment loan.

The first two stages are usually time critical. And because smaller projects like a duplex or townhouse development can be completed within short timeframes, a short-term development loan and then a construction loan from a private lender might be more advantageous to a property developer client.

Once the project is completed and if the developer decides to keep the property as a long-term investment, the loan could be refinanced to a bank as they’re much more likely to lend on an investment loan than they are on a development or construction loan.

About PMA

Private Mortgages Australia offers short-term, flexible loans to business clients and property developers. Our credit team is readily available to accommodate brokers and borrowers alike. We pride ourselves on our quick response time.

We also provide generous referrer fees within 24 hours of a loan settling with no clawbacks!

If you are a broker and have a business lending scenario you would like to discuss, feel free to contact us or you can complete our Quick App form here (< 10 mins).