Understanding different loan costs!
The variety of different development finance loans available in the UK is quite amazing, and it can be difficult to understand the impact of the various terms and costs applied by various lenders. Here we try to unravel some of the options:-
So first of all – interest costs. Pretty much all lenders charge interest of their funding. Many of the higher rates are quoted as a monthly rate; The lower rates usually as an annual rate, but applied monthly. On the higher rates, be more aware of the impact of compounding – ie. interest charged on interest. This is especially important on development finance which often allows interest to be added to the loan, or accrued. If you can pay it as it arises, your loan will be cheaper. Also, most lenders only apply interest on the actual funds borrowed, but some will apply what is called a “non utilisation fee” – an interest rate charged on the funds you don’t use! The idea here is that they are being compensated for reserving the funds for you instead of lending the money to someone else.
Secondly – fees. Again, a wide variety of practice. All lenders, I think without exception, will charge you an initial arrangement/set up fee. This is to cover their costs (and no doubt profit element) for setting up the facility. The fees range from 1% to 3%, with most in the 1.5% to 2% bracket. On top of this, you can expect to pay a valuation/development appraisal fee, a legal fee, and possibly an initial and then ongoing monthly fee paid to a monitoring surveyor who will monitor the scheme for the lender as it progresses. On conclusion of the scheme, most lenders charge an “exit” fee – based either on loan amount (the cheaper option) or against GDV (usually more expensive). There are various other smaller administration fees charged by many lenders at various stages of the scheme. There are variances – some lenders may accept more informal monitoring on smaller schemes, and some may not insist on a formal valuation, having the in house skills to assess value themselves.
So why are there so many different permutations of costs? Its essentially linked to perception of risk. So the more experienced you are, the lower the cost, or the more money you have to put into the scheme, the lower the risk and therefore cost. With at least 50 specialist development funders in the UK, we would (obviously) recommend you to use a reputable broker to ensure that you have the best chance of getting the best rates and terms for your particular scheme. Its important that the broker takes time to understand and probably mitigate the apparent risk to the lender in order to obtain the best deal for you.
Beware of brokers not being truly whole of market focused – some will have a very small panel of lenders whom they use time and time again. This risks getting an inferior deal. Here at Key, we are whole of market and independent – and with over 300 years of combined banking experience we will source the funding best suited to your needs and circumstances, and be open, clear and honest as to rationale.