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4.3.3 Mortgages
Mortgages originally provided the most common form of long-term
development finance, where a mortgage is a loan secured on a property
whereby the borrower has to repay the capital loan plus interest by a certain
date.
Mortgages may normally be granted on a loan-to-value ratio (LVR) basis of
between 60 and 80% depending on the risk involved.
Mortgage loans are normally for 2025 years in line with the length of
occupational leases, although this time period is open to negotiation.
Various methods have been developed to overcome the initial deficit
problem caused by the difference between rental income and interest
repayments over the first 5 or 10 years, e.g. interest payments may be fixed
for a certain period and then converted into a variable rate.
4.3 METHODS OF DEVELOPMENT FINANCE
The property development industry is part of the larger real estate market,
which is subject to changing supply and demand levels, resulting in often
clearly defined property cycles.
Most lenders now take an active role in understanding the dynamics of the
property market and the likelihood that the development will reach its full
potential.
At any given time there will be a myriad of financially strong companies: new
players embarking upon development schemes on the basis of pre-lets and, in
some cases, speculative schemes.
Many vacant sites are testament to property developers waiting for the
optimal time to initiate a proposal or re-approach a lender when the market is
on the rise.
Property developers have a wide variety of lenders and associated products
available to them, although the market is constantly changing and adjusting to
its own supply and demand forces.
Chapter 4 Development Finance