Understanding the True Cost of Development Finance
When evaluating a property development opportunity, getting the finance costs right is essential to producing an accurate project appraisal. **Development finance** involves multiple layers of cost beyond the headline interest rate, and underestimating these can erode your profit margin or even turn a viable project into a loss-maker.
This guide breaks down every cost component you will encounter when arranging [development finance](/services/development-finance) in the UK, with current market rate ranges and practical guidance on how to secure the most competitive terms.
Interest Rates: What to Expect in 2025-2026
Development finance interest rates in the UK currently range from approximately **7% to 12% per annum**, with the majority of mid-market deals pricing between **8% and 10%**.
Several factors determine where your rate falls within this range:
Loan-to-GDV Ratio
The single biggest driver of pricing is leverage. A facility at **55% LTGDV** will price significantly lower than one at **70% LTGDV**. As a rough guide:
| LTGDV Range | Typical Rate Range |
|---|---|
| Below 55% | 7.0% - 8.5% |
| 55% - 65% | 8.5% - 10.0% |
| 65% - 70% | 9.5% - 12.0% |
| Above 70% (with mezzanine) | 12.0%+ (blended) |
Borrower Experience
Lenders offer their best rates to **experienced developers** with a proven track record of completing similar projects. A developer with 10+ completed schemes will typically secure rates 1-2% lower than a [first-time developer](/knowledge-hub/development-finance-first-time-developers).
Loan Size
Larger facilities generally attract lower rates due to economies of scale. A £5m+ facility will typically price more competitively than a £500,000 loan.
Location and Project Type
Prime locations in areas with strong buyer demand command better terms. A residential scheme in a commuter town with evidenced demand will price lower than a speculative commercial conversion in an unproven market.
Lender Type
High street banks such as **Lloyds**, **NatWest**, and **Barclays** offer the lowest rates but have the strictest criteria and longest processing times. Specialist lenders like **Shawbrook**, **Aldermore**, and **Hampshire Trust** price slightly higher but offer greater flexibility. Challenger banks including **Allica Bank**, **Investec**, and **Recognise** bridge the gap between high street and specialist.
**Key Takeaway:** The headline rate is only one component of the total cost. A lender offering 8% with a 2% arrangement fee and 1% exit fee may be more expensive overall than a lender offering 9% with a 1% arrangement fee and no exit fee.
How Interest Is Calculated and Charged
Rolled-Up Interest
Almost all development finance facilities use **rolled-up interest**, meaning interest accrues daily and is added to the loan balance rather than being paid monthly. This is critical for cash flow because the development generates no income during the build phase.
Interest is typically calculated on a **daily basis** on the drawn balance. As you draw down more of the facility, the interest charge increases. This means the effective interest cost is lower than the headline rate might suggest, because you are not paying interest on the full facility from day one.
Worked Example: Interest Cost Calculation
Consider a development finance facility of **£2,000,000** at **9% per annum** over a **15-month term**:
- Month 1: Day-one drawdown of £800,000 (site purchase)
- Months 3-12: Build drawdowns totalling £1,000,000 released progressively
- Months 12-15: Sales period, full facility drawn
The total interest cost would be approximately **£165,000-£180,000**, rather than the £225,000 you might expect if the full £2m were drawn from day one. This is because interest only accrues on the amount actually drawn at any given time.
Retained vs Non-Retained Interest
Some lenders **retain** (hold back) the projected interest from the initial advance, ensuring there are always funds available to cover interest charges. Others allow interest to accrue as a separate liability. Retained interest reduces your day-one net advance but provides certainty that interest will be covered.
Arrangement Fees
The **arrangement fee** (also called a facility fee or commitment fee) is charged by the lender for setting up the loan. Current market rates are:
- Typical range: 1% to 2% of the total facility
- Most common: 1.5%
- Large facilities (£5m+): May negotiate down to 1% or below
On a £2,000,000 facility at 1.5%, the arrangement fee would be **£30,000**.
Arrangement fees are usually handled in one of three ways:
- Deducted from the initial advance - the most common approach
- Added to the loan - increases the total borrowing but preserves equity
- Paid upfront - rare, but some lenders offer a small discount for this
Exit Fees
**Exit fees** are charged when the loan is repaid. Not all lenders charge them, and the trend in the market is moving away from exit fees. Where they apply:
- Typical range: 0.5% to 1.5% of the loan
- Calculated on: Either the total facility or the amount drawn at redemption
On a £2,000,000 facility at 1% exit fee, this would be **£20,000**.
**Key Takeaway:** Always check whether the exit fee is calculated on the total facility or the drawn balance. A 1% fee on the full £2m facility costs twice as much as 1% on a £1m drawn balance if you have repaid half the loan through unit sales.
Monitoring Surveyor Fees
A **monitoring surveyor** (also called a project monitor or PMA - Project Monitoring Agent) is instructed by the lender to inspect the development at each drawdown stage. Their role is to verify that work has been completed to the required standard and that the remaining facility is sufficient to complete the project.
Typical Costs
- Per inspection: £500 to £1,500
- Number of inspections: 5 to 8 for a typical scheme
- Total monitoring cost: £3,000 to £10,000+
Larger, more complex developments may require more frequent inspections and higher fees.
Who Pays?
The borrower pays monitoring surveyor fees. These are usually deducted from the relevant drawdown or invoiced separately.
Valuation Fees
The lender instructs an **independent RICS valuation** of the site and proposed development. The valuer provides:
- Current market value of the site
- Gross Development Value (GDV) of the completed scheme
- Assessment of build costs and programme
- Commentary on market conditions and demand
Typical Costs
- Small schemes (under £1m GDV): £2,000 to £4,000
- Mid-market (£1m-£5m GDV): £3,500 to £7,500
- Large schemes (£5m+ GDV): £7,500 to £15,000+
Valuation fees are payable by the borrower, usually upfront before the loan completes.
Legal Fees
Both the borrower and the lender instruct separate solicitors. The borrower pays both sets of legal fees.
Typical Costs
- Borrower's solicitor: £3,000 to £10,000+ depending on complexity
- Lender's solicitor: £3,000 to £8,000+ depending on complexity
- Total legal costs: £6,000 to £20,000+
More complex structures (multiple sites, mezzanine layers, joint ventures) attract higher legal costs.
Broker Fees
If you use a specialist broker to arrange your [development finance](/services/development-finance), they will charge a fee. Using a broker is strongly recommended because they:
- Access the whole market including lenders who do not deal directly with borrowers
- Present your project in the format lenders prefer
- Negotiate better rates and terms
- Manage the process from application to drawdown
Typical Costs
- Standard fee: 1% of the facility
- Large facilities: May negotiate to 0.5-0.75%
- Minimum fees: Usually £5,000 to £10,000
Quantity Surveyor Reports
Some lenders require an independent **quantity surveyor (QS) report** to verify your build cost estimates. Even where not mandated, a QS report strengthens your application.
Typical Costs
- Basic cost report: £2,000 to £5,000
- Full QS service (including cost management): Varies by project
Total Cost Worked Example
Let's put all the costs together for a realistic mid-market development:
**Project**: 8-unit residential scheme **GDV**: £3,200,000 **Total facility**: £2,100,000 (66% LTGDV) **Term**: 18 months **Rate**: 9.25% pa rolled up
| Cost Item | Amount |
|---|---|
| Interest (rolled up, estimated) | £210,000 |
| Arrangement fee (1.5%) | £31,500 |
| Exit fee (1%) | £21,000 |
| Monitoring surveyor (6 visits) | £6,000 |
| Valuation | £5,000 |
| Legal fees (both sides) | £14,000 |
| Broker fee (1%) | £21,000 |
| Total finance costs | £308,500 |
This represents approximately **9.6% of GDV** or **14.7% of the total facility**. These costs must be factored into your development appraisal alongside land, build, and professional costs to calculate your true profit margin.
Strategies to Reduce Your Finance Costs
1. Minimise Your Build Programme
Because interest accrues daily on the drawn balance, completing the build faster directly reduces your interest costs. Efficient project management and an experienced contractor can save tens of thousands in interest.
2. Reduce Leverage
Bringing more equity to the project lowers your LTGDV, which qualifies you for better rates. Even a small reduction from 70% to 65% LTGDV can save 1-2% on rate.
3. Build Your Track Record
Each completed project strengthens your position for the next one. Lenders reward experience with better pricing and higher leverage.
4. Work with a Specialist Broker
A broker who specialises in development finance knows which lenders are most competitive for your project type and can negotiate fees. The broker fee is typically offset many times over by the savings achieved. [Contact our team](/contact) to discuss your project.
5. Negotiate Exit Fees
Exit fees are often negotiable. If a lender insists on an exit fee, ask for it to be calculated on the drawn balance rather than the total facility, or request a reduction in exchange for a slightly higher arrangement fee.
6. Pre-Sell Units
If you can demonstrate pre-sales or reservations, lenders may offer improved terms because the exit risk is reduced.
**Key Takeaway:** The total cost of development finance for a typical mid-market scheme is approximately 8-12% of GDV. Factor this into your appraisal from the outset, and use the strategies above to keep costs as low as possible.
Using a Development Finance Calculator
Before approaching lenders, model your project economics using a [development finance calculator](/calculators/development). This helps you understand the relationship between GDV, build costs, finance costs, and your target profit margin.
A good calculator will show you how changes in interest rate, build programme duration, and leverage affect your bottom line, allowing you to stress-test your assumptions before committing to a project.
Summary
Development finance costs are multi-layered, and the headline interest rate tells only part of the story. A thorough understanding of all fee components - arrangement fees, exit fees, monitoring costs, valuations, legal fees, and broker fees - is essential for accurate project appraisal.
By working with a specialist broker, minimising your build programme, and structuring your facility efficiently, you can keep finance costs to a manageable proportion of your development profit.
If you would like a detailed cost breakdown for your specific project, [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.*