How Do Housing Developers Get Money To Build Houses?

Updated 23 May 2016 – By Loanstreet


The funds required to build a housing development can be quite extensive. It is rare to have developers that fund the entire project on their own. To maintain liquidity, they often opt to be financed by a bridging loan.This is followed by another party providing loans to buyers that is known as end-financing. If you are unclear of what bridging loans and end-financing are, read on.

What Are Bridging Loans?

Bridging loans are short-term funding loans used by developers to fund their GCC (Gross Construction Costs).

Bridging loans are usually charged at a higher interest rate compare to mortgage loan but lower than other types of financing such as overdraft facility. It has to reflect the high risk that lenders face should developers fail to meet their financial obligations. The biggest impact should arise from the failure to attract sufficient buyers.

Albeit the high interest rates, developers still clamour for bridging loan offers to fill the gap between the time when the purchase agreement is signed and the time at which long-term financing can be obtained.

This eases the cash flow of developer during the construction period while pending receipt of proceeds from end purchasers or their end- financiers. Also, the scope of projects usually exceed 100’s of millions and developers simply don’t have the necessary capital power.

What Is End-Financing?

Financial institutions that provide bridging loans to developers can also arrange to finance prospective buyers home purchases. This is known as end-financing. The fact that a financial institution can lend to both the developers and the buyers can be seen as killing two birds with one stone.

It doubles the customer base but also increases the risk of default by both parties. Risk of default by any one party can be substantial, hence financial institutions usually only offer to loan a portion of the project. The remaining portions are financed by other institutions.

Effectively, home buyers only can borrow money from more than one end-financier. Additionally, different end-financiers can provide different margins of finance which opens the competitive space for consumers to choose from.

How Do The Loans Connect The Whole Home Building Process?

Developers first begin by approaching financial institutions for a bridging loan. This is accompanied by presenting their project plans and timelines. If feasible, financial institutions will approve a bridging loan with an overdraft facility.

With the influx of cash, developers can now proceed to do the necessary marketing arrangements. If buyers are interested in a purchase an S&P Agreement is signed and the developer will receive a 10% down payment of the home price.

From there, developers can start the first stage of construction. Home buyers who borrow a mortgage loan from end-financiers of the project will have their loan disbursed to developers according to the stage of construction.

Conclusion

Knowing the process of home building can be beneficial to you so you remain on your toes when dealing with developers in future. After all purchasing an abandoned project can be a nightmare! If you have already found a home you wish to purchase, don’t forget to use our home loan comparison  tool to get the best loans in the market.

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