A developer needed £1.8 million to build four townhouses in Surrey. His bank, where he'd held accounts for 15 years, offered £900,000 at 60% loan to value. The numbers didn't work. He couldn't start the build with that level of funding.
Within three weeks, we arranged £1.65 million from a specialist development lender at 75% of gross development value. The project completed on schedule, all units sold, and the developer has since built 12 more properties using the same finance structure.
Here's the reality: banks have retreated dramatically from development lending over the past decade. Most traditional lenders cap at 60% LTV. First time developers face even tighter restrictions. Many viable projects simply can't get funded through conventional channels.
This guide will show you exactly how development finance works, what it costs, how to qualify, and how to structure deals that actually get funded in today's market.
What Is Development Finance?
Development finance is short term funding secured against property, designed specifically for building projects. Unlike a traditional mortgage that lends against existing value, development finance lends against what the property will be worth when you've finished building.
This fundamental difference is why developers can access more capital than traditional lending allows. A bare plot worth £400,000 today might be worth £1.2 million once you've built four houses on it. Development lenders assess the future value, not just current worth.
How Development Finance Differs from Other Property Lending
| Feature | Development Finance | Bridging Finance | Commercial Mortgage |
|---|---|---|---|
| Purpose | Ground up builds, major conversions | Quick purchase, light refurb | Completed investment property |
| Assessment Basis | Future GDV | Current value | Current value and income |
| Typical Term | 12 to 24 months | 3 to 18 months | 5 to 25 years |
| Fund Release | Staged drawdowns | Single release (or 2 stage) | Single release |
| Monitoring | QS inspections required | Rarely needed | None |
| Interest Rates | 0.75% to 1.5% per month | 0.55% to 1.2% per month | 4% to 7% per year |
The key concept to grasp: development finance is assessed differently because it's inherently riskier for lenders. They're lending against a vision, not a finished asset. This is why interest rates are higher, but it's also why you can access leverage that traditional lenders simply won't provide.
How Development Finance Actually Works
Understanding the mechanics of development finance is crucial before you apply. The structure is fundamentally different from a standard property loan.
The Staged Drawdown Structure
Development finance releases in stages tied to build milestones, not as a lump sum. Here's what actually happens:
- Day 1: Land purchase funds released (typically 100% of agreed land value)
- During build: Monthly or bi monthly drawdowns against certified completion of works
- Each drawdown: Your quantity surveyor (QS) certifies work completed to date
- Lender releases: Funds equivalent to certified value (usually 90% to 100% of work done)
- Final retention: Last 5% to 10% held until practical completion achieved
A typical 12 month build with £800,000 of construction costs might see drawdowns of £80,000 to £120,000 per month, released as foundation work completes, then first floor, then roof structure, then internal fit out, and finally finishing trades.
Critical Point: Timing Your Finance
You need to own the land before development finance can complete. If you're buying land with the intention to develop, you'll typically need bridging finance first to secure the plot, then refinance onto development finance once ownership is complete. We can structure both facilities simultaneously to ensure smooth transition.
Interest: Rolled Up vs Serviced
Development finance offers two ways to pay interest, and your choice significantly affects cash flow during the build:
Rolled Up Interest (Most Common)
Interest accumulates monthly and is added to the loan balance. You pay nothing during the build. The accumulated interest is repaid when you exit (through sales or refinance).
Example: £1.5 million facility at 1% per month for 12 months. Month 1 interest: £15,000. This gets added to the loan. Month 2 interest: calculated on £1.515 million. By month 12, total interest accumulated is approximately £190,000.
Serviced Interest
You pay interest monthly from your own funds. Total cost is lower because interest doesn't compound. Requires you to have income or reserves to support monthly payments.
Same example with serviced interest: £1.5 million at 1% per month for 12 months. Total interest paid: £180,000 (£15,000 × 12 months). You save approximately £10,000 compared to rolled up structure.
How Much Can You Borrow?
Development finance uses three different measurements, and understanding each is critical to knowing your true borrowing capacity.
The Three Key Metrics
Loan to Value (LTV)
Percentage of the current site value the lender will provide. Typically 65% to 75% for development sites. If your plot is worth £500,000, you might borrow £350,000 to £375,000 against its current value.
Loan to Cost (LTC)
Percentage of total project costs (land plus build) the lender will provide. Senior lenders typically offer 60% to 75% LTC. With mezzanine finance, you can reach 90% to 100% LTC. If total costs are £1.3 million (£500,000 land + £800,000 build), 70% LTC gives you £910,000.
Loan to Gross Development Value (LTGDV)
Percentage of the completed project value. Most senior lenders cap at 65% to 70% LTGDV. If your completed scheme is valued at £2 million, 70% LTGDV allows £1.4 million borrowing.
Which Metric Limits Your Borrowing?
Lenders calculate all three and use whichever produces the lowest loan amount. This protects them from overlending. In practice, LTGDV is usually the binding constraint for viable developments.
Worked Example: Calculating Your Maximum Loan
Let's use a real scenario to demonstrate how this works:
Project Details:
- Site value: £500,000
- Build costs: £800,000
- Total project cost: £1,300,000
- Gross Development Value (GDV): £2,000,000
- Profit margin: £700,000 (35% of GDV)
Calculation at 70% LTV, 70% LTC, 70% LTGDV:
- LTV: £500,000 × 70% = £350,000
- LTC: £1,300,000 × 70% = £910,000
- LTGDV: £2,000,000 × 70% = £1,400,000
The lender would offer £910,000 (the LTC constraint). This means you need £390,000 of your own money (£1,300,000 total cost minus £910,000 loan).
Adding Mezzanine Finance:
A mezzanine lender might add another 25% LTC on top, giving you an additional £325,000. Total borrowing: £1,235,000. Your cash requirement drops to just £65,000 (5% of costs).
The trade off: combined interest rate will be 1.5% to 2% per month instead of 0.9% for senior debt alone. But you've preserved capital for other opportunities.
What Does Development Finance Cost?
Let's be radically transparent about costs. Development finance is more expensive than a traditional mortgage. But the question isn't whether it's cheap. The question is whether it enables a profitable project that wouldn't otherwise happen.
The Complete Cost Breakdown
Arrangement Fee: 1.5% to 2%
Charged on the total facility size. On a £1.5 million facility, expect £22,500 to £30,000. Usually added to the loan (you don't pay upfront). Some lenders charge 2% but offer lower monthly interest rates.
Interest Rate: 0.75% to 1.5% Per Month
That's 9% to 18% annualised. The rate depends on your experience, loan to value, project complexity, and lender appetite. First time developers pay towards the higher end. Experienced developers with strong track records secure better rates.
Exit Fee: 0% to 1%
Some lenders charge an exit fee when you repay. Others don't. Always factor this into your comparison. A lender with no exit fee but 0.1% higher monthly rate might be more expensive overall.
Valuation Fee: £3,000 to £10,000+
Depends on project size and complexity. Simple 4 house scheme: £3,000 to £4,000. Complex mixed use conversion: £8,000 to £12,000. You pay this upfront.
Legal Fees: £2,000 to £6,000+
You pay both your legal costs and the lender's legal costs. Budget £1,500 to £3,000 for your solicitor, similar amount for the lender's solicitor. Complex security structures cost more.
Monitoring Surveyor: £500 to £1,500 Per Visit
Typically 6 to 12 visits over the project (monthly or tied to major milestones). Budget £6,000 to £15,000 total. The QS inspects works, certifies completion, and authorises drawdowns.
Total Cost Example: £1.5M Facility Over 12 Months
- Arrangement fee (2%): £30,000
- Interest (1% per month, rolled up): £190,000
- Exit fee (1%): £15,000
- Valuation: £4,000
- Legal fees (both sides): £5,000
- Monitoring surveyor (10 visits): £10,000
- Total finance costs: £254,000
- Effective cost: 16.9% of the borrowed amount over 12 months
On a £2 million GDV project with £700,000 gross profit, these costs leave you with £446,000 net profit. The finance enabled the project. Without it, you'd have zero profit because the build wouldn't happen.
The Hidden Cost of Underfunding
A developer who takes 18 months instead of 12 months because they underfunded the project loses more in holding costs and opportunity cost than they save on interest. The right amount of finance, even at higher cost, often produces better total returns than cheap inadequate funding.
How to Qualify for Development Finance
Lenders assess six core factors when deciding whether to fund your project. Understanding what they're looking for dramatically improves your approval chances.
1. The Site and Planning
Full planning permission is ideal. Outline planning with clear conditions is acceptable to many lenders. Sites with no planning are much harder to finance and require significantly more equity.
Lenders check: planning conditions, Section 106 agreements, ransom strips, access rights, contamination, flood risk. Any complications reduce your leverage or require specialist lenders.
2. Build Costs vs Market Comparable Evidence
Your build costs must be credible. Lenders compare your estimates against BCIS data (Building Cost Information Service) and recent comparable builds in your area.
For larger schemes, lenders require a professional QS cost report. For smaller projects, detailed builder quotes are usually sufficient. Underestimated costs are the fastest route to rejection.
3. Gross Development Value (GDV)
Your valuation must be supported by comparable sales. Recent sales of similar properties within 1 mile carry most weight. Be conservative. Aggressive valuations get challenged and revised down.
Lenders instruct their own RICS valuer. If the valuation comes in 10% below your estimate, your loan amount drops proportionately. Always build in a buffer.
4. Your Development Experience
Experienced developers get better terms and higher leverage. But lack of experience doesn't mean automatic rejection. Here's what actually matters:
- Track record of completed projects (photos, timelines, final accounts)
- Relevant property experience (buy to let, renovations, trades background)
- Quality of your professional team (architect, QS, project manager)
- Your financial strength and liquidity
- Size and complexity relative to experience
5. Exit Strategy
How will you repay the loan? Lenders need confidence in your exit plan. Common strategies include:
- Sale of completed units (provide evidence of demand and selling prices)
- Refinance to buy to let mortgages (show rental values and likely mortgage terms)
- Phased sales with development exit bridging (short term bridge for final units)
- Sale of entire completed scheme (less common, requires bulk buyer)
The exit strategy must be realistic for the location and property type. City centre flats might sell within weeks of completion. Rural 5 bedroom houses might take 6 months. Your timeline needs to match market reality.
6. Financial Standing
Lenders check your credit history, existing commitments, net worth, and liquidity. They're assessing whether you can weather problems during the build.
What they want to see: deposit funds evidenced, 6 months reserves to cover cost overruns, clean credit for at least 12 months, no undisclosed borrowing or commitments.
For First Time Developers: How to Compensate for Lack of Track Record
- Hire an experienced project manager with proven development credentials
- Start with smaller, simpler schemes (3 to 6 units maximum)
- Partner with an experienced developer who takes an equity stake
- Provide additional security or larger deposit to derisk the lender
- Choose a forgiving location with strong demand and clear comparable evidence
The Application Process: What to Expect
Understanding the application timeline helps you plan properly and avoid delays that cost money.
What You Need to Prepare
- Full planning permission documents (decision notice, approved drawings, conditions)
- Detailed build cost schedule (itemised by trade and material)
- QS cost report (for schemes over £1 million build cost)
- Comparable evidence supporting your GDV (recent sales within 1 mile)
- Site ownership documents (if you already own) or purchase contract
- Personal financial information (bank statements, proof of deposit, credit report)
- Evidence of previous projects (if applicable)
Typical Timeline: Enquiry to Funds Release
Days 1-3: Initial Assessment
You provide high level project details. We assess viability and identify suitable lenders from our network of 300+ specialists. You receive an indicative quote showing loan amount, rate, and costs.
Days 4-7: Full Application
You submit full documentation. We package your application to highlight strengths and address any weaknesses proactively. Application submitted to chosen lender.
Days 8-14: Valuation
Lender instructs RICS valuer. Site inspection happens. Valuation report received. If valuation supports your numbers, formal offer issued.
Days 15-28: Legal Work
Both sides' solicitors prepare loan documentation. Searches carried out. Security documents drafted. Final terms agreed.
Days 29-42: Completion
Loan documents signed. Funds released to your solicitor. Land purchase completes (or refinance of existing ownership). Build can commence.
For urgent cases with all documentation ready, we have lenders who can complete in 10 to 14 working days. Complex projects or planning uncertainties can extend the timeline to 8 to 10 weeks.
Exit Strategies That Lenders Accept
Your exit strategy is one of the most scrutinised parts of your application. An unrealistic exit kills deals that are otherwise sound.
Unit Sales (Most Common)
You sell the completed properties individually. This is the standard exit for residential developments. Lenders want to see evidence of buyer demand, realistic pricing based on comparables, and a credible sales timeline.
Timeline planning: Allow 3 to 6 months from practical completion to final sale completion in normal markets. Budget longer for higher value properties or rural locations.
Refinance to Investment Mortgage
You keep the properties and refinance onto buy to let mortgages. This works well for schemes producing strong rental yields. You need to demonstrate rental values and show that mortgage terms will allow you to clear the development loan.
Common challenge: Buy to let mortgages typically offer 75% LTV. If your development loan is 70% of GDV, the refinance should work. If you're at 85% of GDV (with mezzanine), you might need phased sales of some units to bring leverage down.
Development Exit Finance
A bridge between practical completion and sales completing. Useful when units are under offer but sales haven't completed. Gives you breathing room to achieve full asking prices rather than accepting discounted offers under time pressure.
Typical structure: 6 to 12 month bridge at 0.7% to 1% per month. More expensive than development finance but preserves profit margins by avoiding distressed sales.
Sale of Entire Completed Scheme
You sell the whole development to a single buyer (investor, institution, or housing association). Less common for small schemes but viable for larger projects or build to rent developments.
Lenders need evidence that bulk buyers exist for your property type and location. Pre agreed sale prices or letters of intent strengthen applications significantly.
Critical Point: Be Conservative with Sales Timing
If you tell a lender you'll sell 4 houses in 8 weeks, you're either lying or delusional. Markets change. Buyers pull out. Surveys flag issues. Budget 3 to 6 months minimum from completion to final sales. Lenders respect realism more than optimism.
Why Use a Finance Broker for Development Finance?
You can approach lenders directly. Some developers do. But here's what you're giving up by going direct:
Access to 300+ Lenders vs 1
Most development lenders only work through brokers. They don't have direct application channels. Even the lenders who accept direct applications give brokers better access and faster decisions.
In our experience: For any given project, typically 3 to 8 lenders from our network will be interested. Each offers different rates, terms, and leverage. Going direct means you get one option. Using a broker means you get the best option.
Deal Structuring Expertise
How you present your project matters enormously. The same development can be structured as pure equity, senior debt only, senior plus mezzanine, or staged facilities. Each structure has different costs, risks, and approval likelihood.
We've arranged over £150 million in development finance. We know which structures work for which lenders, how to present first time developers, and how to position complex projects for approval.
Better Terms Through Relationships
Lenders compete for broker business. They offer better rates and higher leverage to brokers who bring them quality deals regularly. Our clients typically save 0.1% to 0.3% per month on interest rates compared to direct applications.
On a £1.5 million facility over 12 months, 0.2% per month lower rate saves £36,000. Our broker fee is typically less than the savings we generate.
Time Savings: Days vs Weeks
You're a developer, not a finance specialist. Researching lenders, preparing applications, chasing valuations, and negotiating terms takes time you should spend on your project.
A broker handles: lender research, application packaging, progress chasing, problem solving when issues arise, drawdown management, and extension negotiations if needed.
When Going Direct Makes Sense
Only if you have an established relationship with a specific lender who has funded multiple previous projects for you, and you know with certainty they'll fund this deal at competitive terms.
Even then, getting a broker quote as a comparison costs nothing and takes a few days.
Frequently Asked Questions
Ready to Discuss Your Development Project?
Our team has arranged development finance for projects from £200,000 to £15 million. We'll give you honest feedback on your project's fundability and show you exactly what's achievable with today's lenders.