I want to get into property development for the first time, what sort of mortgage do I need?

I want to get into property development for the first time and I’m not sure what sort of finance I need.

I am married with two small children, I don’t work but my husband is full time and earns a decent salary as a banker in London.

A friend of mine is in a very similar situation and we’d like to get into doing properties up and selling them on together.

We have both done this a couple of times with our own houses in the past, and enjoy it.

We are thinking of setting up a company to do the developments through, which would have my husband, me, my friend and her husband as directors.

We don’t want to use bridging finance as this seems really expensive, but we would be looking to sell the property after we have done the refurbishment – probably between six and 12 months after we buy it.

We’ve built up a deposit equal to 25 per cent of the property we want to buy. My husband and I have a mortgage on our home as do our friends.

Can we get buy-to-let mortgage to do this? Please advise us on the best way to do this. 

Sarah Davidson, of This is Money, replies: Property development and buy-to-let have been profitable for investors over the past 20 years, but both require careful management to get right.

Buy-to-let can go wrong very quickly if you purchase the wrong type of property for the tenant demand in the area, with even two or three months unlet meaning you fall behind on your mortgage payments. 

Similarly with property development, you need to be absolutely sure you understand the local market and deliver the refurbished property to the standard that buyers in the area want and will pay for - there's no point doing a swanky family home in a student area for example. 

Once you are comfortable and sure that you want to proceed, you should consider taking independent advice from a specialist finance broker with experience helping first-time developers and landlords. 

Most mortgage brokers don't get involved with arranging specialist finance themselves, and are likely instead to refer you to someone with the right expertise. 

There are several elements to your situation that you need to think about carefully. To help, I've broken them down into stages. 

Setting up a company

This can be a good idea if you and your friend are going to be doing the developments together, but you should get professional tax and legal advice to help you structure how you plan to take any profits out of the company, as this could affect other elements of your finances - child tax credits for example. 

There are also different types of company, some of which may be more or less suitable for what you're planning. 

Limited company buy-to-let comes in different forms, and has become far more popular recently because of changes to the way personal landlords are taxed. However, usually these companies are simply a special purpose vehicle designed to house the property and income - they won't necessarily come with the long list of responsibilities that owning and directing a company brings. 

These can include legally having to file accounts, board meetings, making tax digital, and if you have employees  - there is auto-enrolment and payroll to consider among other things. 

Finance

It's important to understand that finance lent against property comes in a plethora of different forms depending on what you plan to do with the property in question.

Residential mortgages (the cheapest) are for those wanting to live in the property themselves, buy-to-let bought in your own name is the next cheapest and is only given when you plan to rent out the property. 

More expensive is limited company buy-to-let which nevertheless still requires to you let out the property. 

Within buy-to-let there are also niche areas such as HMOs - houses in multiple occupation - this is where you rent out individual lockable rooms to separate tenants on separate tenancy agreements. 

Commercial mortgages apply when there is a business being run from the property and these are more expensive still.

There is also bridging finance which has traditionally been used to cover the cost of moving house if you buy your next home before you've sold your previous one.

Bridging has always been around but over the past seven years or so, it has matured considerably with a range of banks and professional though small specialist lenders now offering bridging loans. 

Ten years ago you would have paid 2.5 per cent a month for a bridge, whereas now - depending on the amount of equity you put into the property, some lenders will charge just 0.6 per cent a month plus an arrangement fee which is typically between 1 and 2 per cent of the loan amount.

There is also development finance, typically used where the property is in a dreadful state and needs a complete overhaul or where you plan to knock down a property to build a new one  in its place, or where you have bought land and plan to do what's known as a 'ground up' development. 

In between development finance and bridging there sits a range of niche funding options including bridge-to-let, light and heavy refurbishment funding and auction finance. 

Doing up a dive 

For the sort of project you describe, one option would be taking a light to heavy refurbishment loan for the period in which you want to do up the property, which you would then repay on its sale.

These loans can be anything from around 0.6 per cent a month to 1.5 per cent a month and the price you pay will depend on the specifics of the deal. 

Generally, lenders offering this type of product will lend up to 70 or 75 per cent loan-to-value so you'll need a minimum of 25 per cent deposit to put in yourself. 

The more equity you can put into the deal, the lower the rate you'll be offered. You can't search these loans however, as usually they are priced personally for you and your circumstances. 

It's also important to be sure that you can get the work done in the time frame you agree at the start, as some lenders charge extension fees if you go over the initially agreed loan term, others will charge you penalty fees on top.

The loan amount will be calculated on either the existing value when you purchase the property or some lenders will lend against your projected sale value, known as gross development value.

Your exit from the loan is key to getting approved - you'll need to demonstrate that similar properties in the area are selling at the price you expect or if you plan to keep the property, that you will definitely be able to get a buy-to-let mortgage to refinance to when the refurbishment is complete.  

Specialist lenders tend also to operate through brokers only, some of whom will be able to get you cheaper rates than brokers who don't deal with these lenders all the time - so this is why it's really worth tracking down a specialist with a good reputation. 

Experience and access

While you may have done up your own homes, both you and your friend would still be classed as first-time developers or landlords which drastically reduces thhttp://www.thisismoney.co.uk/money/buytolet/article-4674510/Getting-property-development-time.htmle number of lenders willing to give you finance.

There are a few however, so find a broker who specifically helps inexperienced landlords and developers who has a good relationship with these lenders. 

Before you leap into development however, I would suggest speaking to a quality independent mortgage broker who operates in the residential and buy-to-let markets which are far more heavily regulated and offer you consumer protection if things go wrong. 

The danger with going straight to an unregulated broker is that they may help you get the finance but if things don't work out, you could end up severely damaging your finances. So get the full picture looked at by a qualified adviser before you sign on the dotted line. 

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National Planning Policy Framework review: what to expect?

Rumours have been circulating in the last few days that the revised National Planning Policy Framework (NPPF) is about to be issued in draft form. The current expectation is that it will be launched on Monday, 5 March.

Almost two and half years have passed (or four housing ministers - you choose) since the original consultation on changes to national planning policy was launched by then-Communities Secretary Greg Clark. As political priorities within the Government have changed, the consultation on the NPPF revision has repeatedly been put back.

Last year’s Housing White Paper provided some clarity over the extent of the revision that was then envisaged for the NPPF; in particular, it would be setting out a series of new, housing-focused policy. Since then, further consultation documents have been launched and policy announcements have been made, as housing has ever-increasingly become a political prioritynationally, as highlighted by PM Theresa May’s clear message at last year’s Tory Conference.

In order to better understand what we now expect in the new draft NPPF, we have identified four broad policy areas:

• Plan-making
• Housing needs and requirements
• Use of land
• Housing delivery

Plan-making

Given that 53% of English local authorities do not have an up-to-date, post-NPPF local plan in place (as of 31 January 2018), it is no surprise that plan-making is a particularly crucial area for the Government to address. Pledges in the White Paper clarified that the expectation for each local authority to be covered by a single local plan will be removed, while the revised NPPF will also make it clear that plans and policies should not duplicate one another.

National policy will also be amended to encourage local authorities to take a more ‘proactive approach’ in bringing forward new settlements in their plans, for meeting housing requirements. The test of ‘soundness’ for local plans will be changed, at least to make it clear they should set ‘an’ appropriate strategy (rather than ‘the most’, as in the current Framework).

In terms of proposals that the Government has not yet responded to (i.e. hasnot fully committed to), neighbourhood plans may potentially be further strengthened.  Neighbourhood planning groups may be provided with local planning authority housing requirement figures, as well as being expected to set out clear design expectations - through use of design codes - for their areas (this would also apply to local plans, and more detailed development plan documents, such as area action plans).

The September 2017 consultation ‘Planning for the right homes in the right places’ highlighted details on a proposed Statement of Common Ground, which would see neighbouring authorities setting out how they would work to address shared strategic issues and housing requirements.

The Government is also increasing its focus on viability; proposals have been consulted on already for when policy requirements have been tested for viability, the related issue should not usually need to be tested again at planning application stage.

Housing needs and requirements

The spotlight in terms of change for assessing housing needs is focused on theoutcome of the 2017 consultation on a new standard methodology, which depending on how it is introduced will have significant impacts on local planning authority housing targets and planning strategies. Other than that, there are few certainties. No firm pledges have been made on affordable housing, nor on housing for the elderly – both being areas of particular focus for MHCLG ministers in recent months, and even years. But the White Paper did at least propose to strengthen national policy so as to ensure that local planning authorities have ‘clear’ policies in place for addressing the housing requirements of groups with particular needs, such as elderly and disabled people.

A revised definition of the range of affordable housing products will be included in the consultation, with a draft list having been included in last year’s Housing White Paper. Of most interest is the proposed inclusion of ‘affordable private rent housing’, the Build-to-Rent type of affordable housing. It will also be interesting to see what the latest position on starter homes will be, an initiative that has lost much of its traction following changes in Government over the last few years (confirmed by the fact that none of the Housing and Planning Act 2016-related sections has been commenced so far).

Also of interest in this context is the proposed 10% minimum requirement of all homes on individual sites (which are delivering 10 or more units) to be affordable home ownership products.

Use of land

How land is used is an area of concern for the Government; there is a clear political tension in working hard to identify solutions which would both ensure greater housing delivery (moving towards the 300,000 homes/year target), while also protecting the Green Belt and prioritising brownfield over greenfield sites.

The revised NPPF is very likely to retain existing protection of the Green Belt, as proposals in the White Paper have already highlighted that boundaries should only be amended where it can be demonstrated that councils have exhausted all other available options. When Green Belt reviews take place, it has also already been proposed that local planning authorities should focus on previously developed land and/or sites around transport hubs first.

Relating to housing supply, we know that the revised NPPF will be amended to allow local planning authorities to agree their housing land supply on an annual basis, fixed for a one-year period. We also know that measures to encourage the use of small sites - with the requirement that 20% of local housing land supply should be made up of sites of 0.5ha or less - will be consulted on as part of the revised NPPF consultation process. The December 2016 Written Ministerial Statement on neighbourhood planning will also feature in the revised Framework, although it is not known whether this will be amended from how it was proposed in the Housing White Paper consultation.

Intensification policies will also be included, as MHCLG has already confirmed that there will be greater support for upwards residential extensions (up to two extra storeys), and for using brownfield land within settlements for housing. The 2017 Autumn Budget also highlighted how the Government will consult on amending the NPPF to reflect its broad support for the conversion of empty space above high street shops, as well as for minimum housing densities in city centres and around transport hubs.

Housing delivery

Finally, and in relation to increasing housing delivery, the revised NPPF will support the development of local policies to foster the development of small windfall sites. Design, often considered as one of the key causes of local opposition to new homes, is likely to feature more in other national policies, applying to pre-application design discussion and the inclusion of design expectations in statutory plans.

As already stated in the Housing White Paper, the Housing Delivery Test will be introduced to monitor delivery across England’s local authorities; the details of the Test will be crucial, and the Government clarified at the 2017 Autumn Budget that it will consult on strengthening the proposed tiered approach in cases of under-delivery.

In terms of diversifying housing market ‘players’, small and medium housebuilders will benefit with increased policy support for developing small sites, while the revised NPPF is also likely to explicitly refer to Build to Rent and set out policy expectations in relation to affordable private rent.

Last of all, and to ensure the implementation of permissions, the Government is likely to confirm policy proposals for the reduction of implementation timescales from 3 to 2 years (unless this will hinder viability/deliverability); this measure clearly aims to tackle the alleged ‘land banks’ of larger housebuilders, despite reports questioning this claim.

Of course, we still have another week or thereabouts to wait, before we can discover what the revised NPPF will include, and what further measures areout for consultation. The current expectation is that the final revised Framework will be in place by this summer, although further delays will not be totally unexpected (given the previous track-record).

What is already clear though is the direction the Government is taking in terms of national planning policy. While the 2012 NPPF was published after the last recession and, therefore, strongly focused on viability and deliverability of housing (in particular), the revised NPPF will reflect the current housing crisisand, in particular, issues regarding affordability and the appropriateness of developments.

From an analysis of all that has officially been said so far, the revised NPPF will centre around five main goals: increasing overall housing delivery; increasing affordable housing delivery; strengthening design considerations (particularly at plan-making stage); retaining existing Green Belt protection; and (as a consequence), promoting intensification and increased density in well-connected locations (such as city centres and around transport hubs).

The wait for up to date national policy has not been short, and expectations are surely high amongst development sector stakeholders. Now it is for the Government to demonstrate that the sector has not been waiting in vain, and that the revised NPPF will directly address at least some of the issues currently detrimentally affecting the planning process in England.