There are many kinds of construction project – some are small, some are big; some are quite basic, others maybe architecturally challenging and complex.
Whatever the type of project, however, all are likely to share one thing in common, and that is the need for appropriate funding.
But in the same way that there is such a wide range of different types, construction project finance may also take on characteristics and features peculiar to the particular project in mind. In order to find the most appropriate – and cost effect finance package, therefore, it is often necessary to consult and draw on the expertise and experience of an independent finance broker specialising in this area of finance.
Principles
In common with the principles for funding the purchase for any kind of property, construction finance typically involves raising a loan secured against the property itself – in other words a mortgage.
In the case of a construction mortgage, though, the property does not yet exist. When assessing whether or not to advance the loan, therefore, any mortgage lender needs to consider the risks involved in the works proceeding according to schedule, the production of a building that meets the necessary construction standards, and a finished property that is going to achieve its initially projected market value.
This cost benefit analysis on the part of the lender in construction projects is therefore similar to the financial assessment conducted before granting a buy to let mortgage – the ultimately economic viability of the proposal.
Construction projects
To see how this works, it might be helpful to consider constructions projects undertaken at either end of the scale:
Self-build mortgages
- in recent years, the government has lent its support to encouraging small-scale development projects by individuals and local communities to embark on their own projects for the construction of affordable housing;
- such projects are typically funded by self-build mortgages, which provide the funding that is necessary to carry out the building work itself;
- for the lender’s protection and security – and to make the cost of borrowing reflect the progress being made in the construction, payments of the mortgage are typically staged throughout the course of the project (at its very simplest, for example, this might include 4 main staged payments: purchase of the land, completion of the foundations, building the wind and watertight shell of the building and final completion);
- when the home is completed, it is usual to pay off the self-build loan with the proceeds of a longer-term standard, new residential mortgage;
Construction project finance
- there are, of course, more complex construction projects – often involving the need for multi-million pound finance;
- the principles, though, are largely the same in this type of construction project finance;
- the construction mortgage provides the funding necessary for the building works and the lender takes a calculated risk on the project being completed on time and to a sufficiently high standard to command the projected market value, in the hope and expectation that property market values have not taken a dive during the period of construction;
- once the project is complete, the building is then typically acquired on the strength of a new commercial mortgage – which may have a duration of up to, say, 15 years.
The range of different construction projects that might be undertaken is huge, and this is reflected in the scale and type of mortgages which may be advanced to finance the work.