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Setting up a real estate project requires money and the developer loan is an alternative type of financing to achieve this. These loans have special characteristics, adapted to the project to be financed and also to the characteristics of the real estate sector.
What is a developer loan?
Developer loans are a way of financing real estate projects. This is their main function. Although it is referred to as a developer loan, in reality it can be a loan or a developer credit with mortgage guarantee, the difference between the two is that the loan is made on a closed amount and the credit can be increased as needed until the total credit is exhausted.
This type of loan is usually given to promoters of projects such as housing construction or renovation.
There are also developer loans for housing cooperatives, in which case the members will normally be able to subrogate to the mortgage of the entity that granted the loan. When a person subrogates to the mortgage of the builder, this is also considered a developer loan.
In the case of financing to individuals, rather than a developer’s loan, it is usually referred to as a self-promotion mortgage, because the money is normally used to build the house from scratch.
In short, the term “developer loan” covers all financing of real estate projects granted to the developer, who is the one who promotes the building work.
Characteristics and conditions of developer loans
Promoter loans are unique and different from other financing models. On the one hand, they are usually tailored to each project, which means that their conditions vary greatly from one project to another.
However, there are a number of basic characteristics:
- These are (usually) mortgage-backed loans. The property or building acts as collateral for the loan, just as with a normal mortgage. In other words, in the event of non-payment, the entity could keep the development, something that in reality no entity or platform wants.
- High amounts. The amount will depend on the project and the entity, but can be up to several million euros. Traditional developer loans finance between 60% and 80% of the sale price of the development. Nowadays there are alternatives such as wecity that finance smaller projects for lower amounts.
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- Long repayment terms. Again, this will depend on the project and the loan, as you can see from the examples above. However, it is common for them to have long repayment periods so that the developer can finish the work. They may also include initial grace periods where nothing is paid or only interest is paid without capital amortisation.
- Affordable interest rates, higher than those of a mortgage, but lower than those of a personal loan or the usual bank loans. In any case, this will depend above all on the project, its interest and the timeframe for implementation.
- Payments on a drawdown basis. This is a common practice for new construction and self-development projects. Instead of handing over all the money at once, the bank releases capital from the loan as the work progresses and construction milestones are met.
If you are a developer, you can present your project and wecity will study it.
Advantages of developer loans
Developer loans have been gaining ground over other forms of traditional financing due to advantages such as:
- Tailor-made financing, both in terms of amount and conditions. These loans are highly personalised and adapted to each project.
- Flexibility in repayments, although again this will depend on each project.
- Lower interest rates than other credit lines.
- Speed and agility in processing compared to other loans and loans from traditional banks if we are talking about specialised platforms.
The arrival of real estate crowdfunding has added a new actor to developer financing that stands out for its agility and for financing projects that may not be of interest to large banks due to their volume.
In short, a new way of requesting a developer loan to develop a real estate project and also to invest in them as a private individual.
