What Is Development Finance?
**Development finance** is a specialist short-term lending product designed to fund property development projects across the UK. Unlike a standard mortgage, development finance is structured around the lifecycle of a construction or conversion project, with funds released in stages as work progresses.
Whether you are building new homes from the ground up, converting a commercial building into residential flats, or undertaking a major refurbishment, development finance provides the capital you need at each phase of the project. The loan is then repaid once the completed development is sold or refinanced onto a long-term facility such as a [commercial mortgage](/services/commercial-mortgages) or buy-to-let product.
For developers across the UK, understanding how development finance works is the first step towards funding profitable projects. This guide covers every aspect you need to know before approaching lenders.
How Development Finance Differs from Other Property Loans
Development finance sits in a distinct category compared to standard mortgages and [bridging loans](/services/commercial-bridging). Here are the key differences:
- Staged drawdowns rather than a single lump-sum advance
- Interest rolled up into the loan rather than paid monthly
- Short-term duration, typically 12 to 24 months
- Monitoring surveyor inspections before each tranche is released
- Assessed on project viability as much as borrower financials
A standard commercial mortgage is underwritten primarily on rental income and borrower covenant. A bridging loan provides fast, short-term capital for acquisitions or light refurbishment. Development finance, by contrast, is purpose-built for construction and heavy works, with a drawdown mechanism that aligns funding with build progress.
**Key Takeaway:** Development finance is not simply a large bridging loan. Its staged structure, monitoring requirements, and underwriting criteria make it a fundamentally different product.
The Structure of a Development Finance Facility
Land or Acquisition Funding
Most development finance facilities begin with a **day-one advance** to cover the purchase of the site or property. Lenders typically fund:
- Up to 70% of the land or purchase price
- Or up to 60-65% of Gross Development Value (GDV) on a day-one basis
The borrower provides the remaining equity from their own resources or via a mezzanine lender.
Build Cost Drawdowns
Once the site is acquired, the remaining facility is drawn down in tranches to fund construction costs. Each drawdown is triggered by a **monitoring surveyor visit** that confirms work has been completed to the required standard.
Typical drawdown stages include:
- Substructure - foundations and groundworks complete
- Superstructure - walls, floors, and roof in place
- Weathertight - building is sealed against the elements
- First fix - mechanical, electrical, and plumbing rough-in complete
- Second fix and finishes - kitchens, bathrooms, decorating
- Practical completion - final sign-off and snagging
Lenders may fund up to **100% of build costs**, though combined borrowing (land plus build) is usually capped at **65-70% of GDV**.
Interest Roll-Up
Development finance interest is almost always **rolled up**, meaning it accrues and is added to the loan balance rather than being paid monthly. This preserves the developer's cash flow during the build phase when the project generates no income.
Interest is then repaid alongside the capital when the development is sold or refinanced.
Key Metrics Lenders Use
Understanding the metrics lenders focus on will help you structure your project for approval.
Gross Development Value (GDV)
**GDV** is the total market value of the completed development. For a scheme of 10 houses each valued at £350,000, the GDV would be £3,500,000. Lenders commission an independent **RICS valuation** to determine GDV before issuing terms. Learn more about [how lenders assess GDV](/knowledge-hub/gross-development-value-lender-assessment).
Loan-to-GDV (LTGDV)
This ratio expresses total borrowing as a percentage of GDV. Most senior lenders cap LTGDV at **60-70%**. A lower LTGDV generally secures better pricing.
Loan-to-Cost (LTC)
LTC compares total borrowing to total project costs (land plus build plus professional fees). Typical LTC ratios range from **75-90%**, depending on lender appetite and borrower experience.
Developer Profit Margin
Lenders want to see a healthy **profit margin on GDV**, typically a minimum of **15-20%**. This provides a buffer against cost overruns or market softening.
Contingency
A **build cost contingency of 5-10%** is standard. Projects without adequate contingency are more likely to be declined.
**Key Takeaway:** Before approaching lenders, ensure your project appraisal demonstrates a minimum 15-20% profit on GDV and includes a realistic contingency allowance.
Costs and Fee Structures
Development finance involves several layers of cost. For a detailed breakdown, see our guide to [development finance rates and fees](/knowledge-hub/development-finance-rates-costs-fees).
Interest Rates
Typical development finance rates range from **7% to 12% per annum**, depending on:
- Loan size - larger facilities often attract lower rates
- LTGDV ratio - lower leverage means lower risk and better pricing
- Borrower experience - proven track record reduces rates
- Location and project type - prime locations in strong markets command better terms
Arrangement Fees
Lenders charge an **arrangement fee of 1-2%** of the total facility. This is often deducted from the initial drawdown or added to the loan.
Exit Fees
Some lenders charge an **exit fee of 0.5-1.5%** of the loan, payable on redemption. Many lenders have moved away from exit fees, so this is worth negotiating.
Monitoring Surveyor Fees
Each drawdown inspection costs approximately **£500-£1,500** depending on the project size and complexity.
Professional Fees
Additional costs include:
- Valuation fees: £2,000-£10,000+
- Legal fees: Both borrower's and lender's solicitors
- Broker fees: Typically 1% of the facility
- Quantity surveyor reports: If required by the lender
Who Can Access Development Finance?
Experienced Developers
Lenders prefer borrowers with a **proven track record** of completing similar projects. The more relevant experience you have, the more competitive your terms will be.
First-Time Developers
Several lenders now accommodate [first-time developers](/knowledge-hub/development-finance-first-time-developers), particularly those who:
- Have a strong professional team (architect, QS, main contractor)
- Bring significant equity (30-40% of project costs)
- Have relevant professional experience (construction, surveying, project management)
- Start with smaller, lower-risk projects
SPV Structures
Most development finance is advanced to a **Special Purpose Vehicle (SPV)** - a limited company set up specifically for the project. This ring-fences risk and simplifies the legal structure. Directors of the SPV typically provide personal guarantees.
The Application Process Step by Step
Step 1: Project Appraisal
Before approaching lenders, prepare a comprehensive **project appraisal** including:
- Site details and planning status
- Architect's drawings and specifications
- Build cost schedule (ideally from a quantity surveyor)
- Realistic build programme
- GDV assessment with comparable evidence
- Profit and loss projection
- Contingency allowance
Step 2: Broker Introduction
Working with a specialist [development finance broker](/services/development-finance) is strongly recommended. A broker understands which lenders suit your project profile and can present your application to maximise approval chances. [Contact our team](/contact) to discuss your project.
Step 3: Indicative Terms
Suitable lenders issue **indicative terms** (also called heads of terms or term sheets), usually within 48-72 hours. These outline the proposed facility amount, interest rate, fees, and key conditions.
Step 4: Formal Valuation and Due Diligence
Once you accept indicative terms, the lender instructs:
- An independent RICS valuation
- Legal due diligence via their solicitors
- Credit and AML checks on all borrowers and guarantors
Step 5: Credit Committee Approval
The completed file goes to the lender's **credit committee** for formal approval. This typically takes 1-3 weeks depending on the lender.
Step 6: Legal Completion
Solicitors finalise the loan documentation and register the lender's charge. The initial drawdown is released on legal completion, typically funding the site acquisition.
Step 7: Build Phase Drawdowns
During construction, you request drawdowns as work is completed. The monitoring surveyor inspects and certifies each stage before funds are released.
Step 8: Exit
On completion of the development, the loan is repaid via sale proceeds or refinancing.
Typical Timescales
| Stage | Typical Duration |
|---|---|
| Indicative terms | 2-5 working days |
| Valuation and due diligence | 2-4 weeks |
| Credit approval | 1-3 weeks |
| Legal completion | 2-4 weeks |
| Total from application to first drawdown | 6-12 weeks |
For urgent land acquisitions, [bridging finance](/services/commercial-bridging) can be used to secure the site while development finance is arranged.
Common Exit Strategies
Every development finance application must include a clear **exit strategy**. The main options are:
- Open market sale - selling completed units to repay the loan
- Refinance to investment - retaining units and refinancing to a commercial mortgage or buy-to-let product
- Development exit finance - a short-term facility to repay the development loan while sales complete (see our development exit finance guide)
- Forward sale - pre-selling units to a housing association or investor
**Key Takeaway:** Lenders want to see a realistic, evidenced exit strategy. If selling, provide comparable sales data. If refinancing, obtain a decision in principle from a long-term lender.
Risk Factors Lenders Assess
Lenders evaluate multiple risk factors when underwriting development finance:
- Planning risk - is full planning permission in place?
- Construction risk - is the contractor experienced and properly insured?
- Market risk - are GDV assumptions realistic in the current market?
- Cost risk - are build costs properly evidenced with adequate contingency?
- Borrower risk - does the developer have the experience and resources?
- Location risk - is there demand for the end product in this area?
Choosing the Right Lender
The UK development finance market includes a wide range of lenders, from high street banks to specialist funds. Each has different appetites for project types, sizes, and borrower profiles. Key lenders in the market include:
- High street banks such as Lloyds, NatWest, and Barclays for larger, lower-risk schemes
- Specialist lenders such as Shawbrook, Aldermore, and Hampshire Trust for mid-market projects
- Challenger banks such as Allica Bank, Recognise, and Investec for flexible structuring
- Development finance funds for higher-leverage or more complex schemes
Working with a broker who has relationships across the market ensures you access the most suitable lender for your specific project. Use our [development finance calculator](/calculators/development) to model your project economics.
Summary
Development finance is a powerful and flexible funding tool that enables property developers to undertake projects they could not finance from their own resources alone. Its staged drawdown structure, interest roll-up mechanism, and project-focused underwriting make it fundamentally different from other property finance products.
Success with development finance requires thorough preparation: a well-evidenced project appraisal, realistic cost and value assumptions, a competent professional team, and a clear exit strategy. By understanding how lenders assess your project and what they need to see, you can position your application for the best possible outcome.
If you are planning a development project and want to explore your financing options, [get in touch with our team](/contact) for a no-obligation discussion.
*Written by Matt Lenzie, Founder of Commercial Mortgages Broker. Ex-Lloyds Bank & Bank of Scotland.*