In the dynamic world of development finance, understanding the nuanced relationship between inflation and interest rates is crucial. Property developers, brokers, and financial lenders are always navigating the intricate web of economic factors that might influence the cost of borrowing.
The last 3-4 years has been one of the most turbulent and unpredictable economic periods in the UK for the last couple of decades. In this blog, we will take a look at the implications of inflation on development finance and interest rates.
The basics of development finance interest rates
Development finance is a finance option tailored specifically to property development projects. Property development loans are usually short-term and interest rates on these loans play a pivotal role in calculating the overall cost of borrowing for developers.
Some financial lenders require interest to be paid monthly throughout the duration of the loan, while others allow interest to be paid at the end of the loan in one lump sum. When inflation causes interest rates to change, the developer must make sure they either have the cash flow to pay the increase in monthly interest payments, or they are able to raise enough capital at the end to pay off the loan including any additional interest.
Lenders usually offer a maximum loan-to-value, partly to ensure that rising inflation or market changes wouldn’t impact a developers ability to repay the loan. Hunter Finance can offer development loans of up to 60% of the Gross Development Value (expected value of the finished development).
Inflation’s ripple effect on property development finance interest rates
Inflation, the rise in the general price level of goods and services over time, has a cascading impact on various economic elements. Development finance interest rates are not immune to these effects. Here’s how inflation comes into play:
Cost of borrowing
As inflation rises, the cost of borrowing tends to increase. Lenders adjust interest rates on their own portfolio in line with the interest rates set by the central bank. Property developers seeking loans for their projects may find themselves facing higher interest rates in inflationary environments, such as those we have seen in the last couple of years.
Real interest rates
Real interest rates, which account for inflation, are a crucial metric for developers. When inflation is high, real interest rates may be higher than nominal rates, making the actual cost of borrowing more expensive than initially anticipated.
Adapting to changing economic conditions
In the realm of property development finance, adaptability is key. Developers and investors must be proactive in responding to economic shifts. Here are some strategies for navigating the impact of inflation on loan rates:
Risk mitigation
Developers can work with financial experts to assess and mitigate risks associated with inflation. Even for short-term financing options, the last few years is testament to how quickly the economy can change. This could involve exploring fixed-rate financing options or incorporating inflation clauses into loan agreements.
Developers may find working with smaller, independent lenders like Hunter Finance a more flexible option during times of economic uncertainty.
The role of central banks
Central banks play a crucial role in managing inflation and interest rates. Their monetary policies, including adjustments to the benchmark interest rates, can directly impact property development loan rates. Developers should stay informed about central bank decisions and adapt their financing strategies accordingly.
The relationship between inflation and property development finance interest rates is intricate and dynamic. Navigating this terrain requires a nuanced understanding of economic factors, proactive risk management, and adaptability to changing conditions. Developers who stay informed, work closely with their finance lenders, and embrace strategic flexibility will be better positioned to thrive in an ever-evolving financial landscape.
Independent lenders such as Hunter Finance can be a safer option for development finance during times of economic uncertainty. Smaller lenders who use their own funds may be able to take on more risk and offer more flexibility with their loan agreements.
Get in touch with Hunter Finance to discuss a property development project you have in the South East of England. We are able to approve and issue development loans within days of application for the right project so apply in principle today.
