Everything you need to know about development finance in the UK - from eligibility criteria to application process. Learn how to fund your property development project.
Development finance is a specialist form of short-term funding designed specifically for property development projects. Whether you're planning a ground-up construction, major refurbishment, or conversion project, understanding development finance is crucial to making your project a success.
Development finance is a short-term loan facility that provides the capital needed to fund property development projects. Unlike traditional mortgages, development finance is released in stages throughout the build process, aligned with construction milestones. This approach protects both the lender and the borrower, ensuring funds are used appropriately and the project progresses as planned.
The typical development finance structure includes:
Funds are released in stages, commonly:
Each stage release is typically triggered by a monitoring surveyor's inspection, confirming the work has been completed to the required standard.
Most development finance is structured as senior debt, typically offering:
Gross Development Value (GDV): The total value of the completed development, based on professional valuation.
Loan-to-GDV: The percentage of the total development value that the lender will provide. Typically 60-70%.
Loan-to-Cost (LTC): The percentage of total project costs (land + build) that will be financed.
Net Development Value (NDV): GDV minus costs of sale, typically calculated at GDV minus 6-8%.
Interest Roll-Up: Interest charges are added to the loan rather than paid monthly, settled when the development is complete and sold or refinanced.
To secure development finance, you'll typically need:
Development finance can be used for:
Development finance involves several cost elements:
Typically 1.5-2% of the total loan facility.
Generally 6-12% per annum, depending on:
Some lenders charge exit fees, typically 1-2% of the loan.
Discuss your project with a development finance specialist who can assess feasibility and suitable lenders.
Prepare comprehensive documentation:
Your broker submits to appropriate lenders with detailed project appraisal.
Suitable lenders provide indicative terms, typically within 48-72 hours.
Chosen lender conducts detailed due diligence:
Solicitors handle the legal documentation and charges.
Funds are released according to the agreed stage payment structure.
Build a Strong Team: Surround yourself with experienced professionals - architect, quantity surveyor, contractor, and broker.
Be Realistic: Use conservative GDV estimates and allow adequate contingency (typically 10-15%).
Manage Cash Flow: Ensure you have funds available to cover costs between stage releases.
Plan Your Exit: Have a clear strategy for repaying the loan - whether through sale or long-term refinancing.
Monitor Progress: Stay closely involved with the build, maintaining communication with your monitoring surveyor.
Development finance requires a clear exit route:
Most common approach - sell completed units to repay the loan. Ensure your pricing is realistic and you've allowed for sales period in your timeline.
If retaining properties for rental income, arrange refinancing to a buy-to-let mortgage before development finance term expires.
For commercial developments, refinance to long-term commercial mortgage based on rental income.
Development finance is a powerful tool for property developers, enabling projects that would otherwise be unachievable. Success requires thorough planning, realistic projections, a strong team, and careful management throughout the build process.
With the right preparation and professional guidance, development finance can help you unlock significant value and build a successful property development business.
Whether you're a first-time developer or experienced operator, working with a knowledgeable commercial mortgage broker ensures you access the most suitable development finance for your project at competitive rates.