FREQUENTLY ASKED QUESTIONS
Why do I have to pay for your services when my home loan mortgage advice is free?
Banks understand residential lending and the housing market. They see it as a low-risk investment and it’s a big part of their day-to-day business. The banks pay commission to advisers for bringing them new home loan clients, which have a high value to the banks.
Development funding is completely different. Unlike a home loan, which often stretches over 30 years, a development loan will usually last for no longer than two years. That means far less profits for the lender. In addition, the major banks don’t have teams of people trained to assess the risks and rewards of developments. They don’t have quick systems and calculators that can give them a yes or no answer.
As a result, development loans have a much lower value to the banks and they do not pay commission for development loans. Even experienced developers with excellent track records have struggled to get funding from the big banks over the past five years.
Luckily, that has opened the door for several high-quality non-bank lenders. These specialist lenders understand development very well. They work with large-scale developers and advisers like us every day. Each specialist lender has its own favourite types of developments and areas its favours; we can match you with the right one.
How much are your development finance fees?
Typically our adviser will cost 1 and 2% of the loan, but also the ongoing management of the draw-downs and variations. We assist with not only securing the loan, management of the draw-downs during the development process.
Can’t I just approach development lenders myself?
Absolutely. You can apply for your own development funding and if you are well-prepared and do plenty of research, and can speak their language. However, you should bear in mind the risks: the small development lending market in New Zealand means deals can go stale quickly if they’re shopped around and turned down. Once that happens, lenders usually won’t take a second look and it can be hard to get your project back on track (we may be able to help you but it is much tougher at this point).
Applying for development funding yourself will take you a significant amount of time and energy, typically five to ten times as much effort as a residential loan; so if you need some help or it’s becoming overwhelming, give us a call. We do this every day, so what seems like a major hurdle to you is often an easily surmountable bump in the road for us.
Which lenders does Loan Market work with?
We work with all the big banks and the specialist lenders. We always start by trying to secure funding from one of the major banks because they offer the lowest interest rates – our first choice is always going to be to get you the cheapest money.
Bank lending is not only the cheapest money on offer, but it’s the toughest to get. Banks have dedicated property funding units (PFUs) with expert staff who are good at assessing risk. For the past few years their main criteria for lending has been experience; banks aren’t looking for unknown developers even if your profit forecasts look outstandingly good. If you are an inexperienced developer with a great-looking feasibility report and a strong financial position, we may be able to get full or partial bank funding from the PFUs.
Partial bank funding is still helpful and we can then secure specialist funding for the balance. If we don’t have success with the banks, we will then approach the specialist lenders. These lenders charge higher interest rates than the banks but provide an equally good service.
What paperwork am I going to need to show lenders for development funding?
You should be prepared to show a lender:
- Fixed price building contract
- Building consent
- Resource consent
- Your QS reports (if you have any)
- Insurance for the development
- Feasibility report
More documentation will be needed depending on your project and application.
How do development payments work?
As a development adviser, we will be helping you not only with securing your funding but also with the draw-downs. These are more complex than with a standard construction loan – lenders will put your project under considerable scrutiny because of the large sums of money and the risks.
You can expect to be asked for a QS report at every drawdown stage. That report will include an audit of all the payments you’ve made since the last draw-down and careful scrutiny of the project to verify it’s as far along as expected.
What is a mandate and why do I need one for development finance?
A mandate is an upfront contract between you, the developer and us, the adviser. It says that if we secure you $2,000,000 in funding, you agree to pay us a fee – for example, 1% of the loan amount, which would be $20,000. Part of that $20,000 total will be paid in an upfront fee before we start work.
The deposit and mandate are standard industry practice for development funding around the world. The deposit is required in the same way your architect needs a deposit; there’s a lot of work for us in packaging your loan application so we need some upfront commitment from you before we invest too much time.Unfortunately the industry needs to use mandates because some developers have previously taken the work done by the adviser and shopped it around themselves, then sidestepped paying the adviser for their work.