Why lower interest rates are not always in your best interest

When you’re applying for funding for your new construction development, interest rates are likely one of your top concerns. Lenders know that - and they’ll vie for your loan application by promising competitively priced interest rates that have the potential to save you thousands. 

Or do they?

Here’s the thing about loans: they’re not always transparent. And while you may think you’ve secured a great deal with a low interest rate, you may be unwittingly signing on for hidden fees and binding conditions you’ll have to meet in order to release the funds. 

That’s why it’s important to carefully review the terms and conditions of your financing offer before signing on the dotted line. We’ve covered a handful of common construction scenarios below to give you some insight into how lenders operate and how borrowers can understand the real cost behind their offer. 

Scenario 1

You’re trying to secure development financing for four high-end townhouses. You meet with a lender that has a higher interest rate but would allow you to start construction without any presales. This means you’ll be able to sell the townhouses once they’re complete, which could lead to a higher sales price. Depending on the profit from the sale, you may be able to offset the higher interest rate while still securing a higher profit margin. This is a more viable choice when compared to a lower-interest lender who requires pre-sales as a condition of the loan.

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Scenario 2

In your search for development financing, you come across a lender advertising a 6% interest rate. This seems great, but when you look through the terms and conditions, you notice a line fee (a fee you pay for a bank to keep credit available for you to use) of 1.75%. When you factor the two costs together, your annual rate will actually be closer to 8% - which could be higher than the other lenders you compared. When looking through the terms and conditions of a loan, keep an eye out for line fees, management fees, or varying establishment fees that may significantly add to the overall interest rates you’ll be paying. 

Scenario 3

In some situations, you may benefit from taking two loans over the course of a project. The first loan - which will come with a higher interest rate and have a shorter payment period - will help you achieve the pre-sales hurdle. The second, longer-term loan will come with a lower interest rate. Stacking the two loans enables the developer to start the project earlier, get their return quicker, reach pre-sales targets, and even reduce the overall financial burden of the project.

Navigating the intricacies of loans when applying for development financing can be a cumbersome process. It’s important to carefully review the terms of a loan before signing so you ensure you have a complete understanding of:

• Presale hurdles
• Miscellaneous fees (line fees, management fees)
• Payment terms
• Total interest rates

The lowest interest rate isn’t always the best offer. If you’re applying for funding for your next construction project, check out our Submit a Loan Scenario simulator and we’ll do an initial evaluation of your financing needs without having to submit a full project finance application. 

We can connect you to lenders for non-bank property development finance at competitive terms and rates. Submit a Scenario or Create an Account.