Development finance

Taking on a property development project is an exciting venture, but securing the proper financing is essential to making your vision a reality.

Development finance refers to funding designed for property developers to accommodate the unique challenges of construction projects. Unlike traditional mortgages, development finance is structured around development timelines, from land acquisition to construction completion.

What is Development finance?

Development finance is a short-term commercial property loan intended for development purposes. It can be used either to finance just the development of an already owned asset, or to purchase land to develop on, and cover the project costs.

It’s often used by developers, investors and landlords looking to improve or increase their portfolios. A development loan can be used on residential, commercial or mixed-use properties, but not usually for owner-occupier residential purchases. If you’re looking for funds to build your own home, you’ll need a self-build mortgage.

Due to the commercial nature of development finance, most lenders in this niche are not regulated by the FCA (Financial Conduct Authority). However, this allows for greater flexibility in their lending. You need to ensure you’re always working with a reputable lender and Home of Specialist Finance carry out due diligence on all lenders recommended.

Key features of development finance

Flexibility: Development finance offers flexibility in terms of loan structures and repayment schedules. This is essential as it allows developers to adapt to the evolving needs of their projects.
Staged funding: Rather than receiving the full loan amount upfront, developers typically receive funds in stages, aligned with project milestones. This ensures that funds are available when needed, minimising interest costs.
Risk assessment: Lenders assess the viability of the development project, including factors such as location, market demand, and feasibility. This thorough evaluation helps both parties manage potential risks.
Interest rates: Interest rates for development finance are often higher than standard mortgages due to the short-term nature of the loans and the increased risk associated with construction projects.

How do development loans work?

Development finance is typically borrowed over a period of 6-24 months to enable the completion of building projects prior to their refinance or sale. The funds are drawn down in stages (known as tranches), and this works slightly differently depending on whether you’re buying land and/or property to develop or simply borrowing the actual development costs.

Interest is only charged on the funds that have been drawn down, meaning you won’t pay interest on the total loan value until you're at the final stage of the project. Lenders will instruct a Quantity Surveyor to ensure each stage of the build is on track before funding is released.

Loans are offered on an interest-only basis and will therefore require a solid exit strategy. This would typically be refinancing onto a buy-to-let mortgage for residential letting purposes or onto a commercial mortgage, but it’s also possible to use the resale of the developed property as a payment strategy.

Who is eligible for Development finance?

First-Time Developers: Aspiring developers looking to break into the industry can access development finance to kickstart their projects and build their portfolios.
Experienced Developers: Seasoned developers with a track record of successful projects can leverage their experience to secure favourable development finance terms.
Commercial Ventures: Those seeking to create commercial properties like offices, retail spaces, or industrial complexes can find tailored development finance solutions

The majority of lenders prefer borrowers to have property development experience, especially for major projects. However, there are some lenders willing to work with first-time developers and investors.

Lenders may also have preferred development niches, for example, some specialise in leisure facilities, whereas others may only be open to residential developments. Home of Specialist Finance will find the best lender for your situation.

Interest rates vary wildly depending on the size and purpose of your loan, as well as your personal circumstances and experience, but the GDV (gross development value) will be the biggest key factor in a lender’s decision. The GDV is the total value of the completed project.

What costs are involved with arranging development finance?

Deposittypically 25-40% if purchasing land or development site. For development costs, some lenders are willing to offer 100% LTV loans, but this will usually require a high-value asset as collateral.
Arrangement feesbetween 1-2% of the loan value, but varies by lender and loan size.
Exit feesfees of 1%-2% may also be payable on some development loans.
Legal feesboth personal and the lender’s legal expenses are payable by the borrower.
Valuation feesvaluation will take place at each new stage of the development so multiple visits should be taken into consideration in line with your project scope.
Drawdown feesmultiple drawdown fees may also apply in addition to the valuation fees at each stage.

How much can you borrow with development finance?

Loans can be into the multiple millions of pounds, but won’t usually be less than £50,000. This is determined on a case-by-case basis, but some lenders have lower maximum loan sizes and offer a lower percentage of the GDV than others. Most lenders will allow you to borrow up to 75% of the land or site value, as well as between 75-100% of the Gross Developed Value (GDV).

Keep in mind that you’ll need to produce a robust set of project plans with clear cash flow demonstrated at each stage of the build, and a contingency fund. Most lenders offer better rates to low-risk developments, so a cautious approach to your borrowing will be rewarded.

Development finance - First steps

No matter what type of project you’re embarking on, using a specialist finance broker such as ourselves to arrange your development finance will ensure you approach the right lender for your needs and make the most of your project’s potential.

Development finance can be complex, even if you’ve used it before. Lenders tend to work in certain industry niches and offer hugely different loan sizes, interest rates and terms. The majority of development lenders are only available through intermediaries, meaning you’ll have limited product access without our expert help.

With a collective experience of over 50 years in specialist finance, and access to a panel of over 30 lenders, we’ll ensure to secure the most suitable development loan, at the most competitive interest rate available to you.

Loan terms

Loan size: £100k - £20m - Please contact Director, Michael O’Brien, for loans in excess of £20m
Length: 1-24 months
Loan value: Up to 100% of the GDV may be available in some circumstances
Rate types: Fixed or variable
Acceptable exit strategies: Sale or refinance
Acceptable security: Residential property, commercial property or land
1st or 2nd charge

Application process and considerations

Project Proposal: Developers present detailed project proposals, outlining the scope, costs, and potential returns. This helps lenders assess the viability of the project.
Exit Strategy: Lenders want assurance that the developer has a clear exit strategy, whether through property sales, refinancing, or other means, to repay the loan at the end of the term.
Collateral: Lenders typically require the development property as collateral. The property's potential value upon completion is evaluated to determine the loan amount.

Development finance can be complex, even if you’ve used it before. Lenders tend to work in certain industry niches and offer hugely different loan sizes, interest rates and terms. Home of Specialist Finance have excellent relationships with lenders built over many years in the industry.

Why Home of Specialist Finance?

Whether you’re an experienced developer or approaching development finance for the first time, at Home of Specialist Finance we can help you source the right level of funding for your development niche.

Our expertise and knowledge can play a huge role in securing the right lender and product for your needs.

With access to a broad selection of lenders, we can ensure you’re getting the best rate available, as well as providing bespoke advice and guidance on improving your application, where necessary.

Whatever your development finance needs, we can offer jargon-free advice and guidance throughout the entire process. Find out more about how we can help here.

Contact our expert team today on 0208 5171141.

Bridging Finance FAQs

Can I take out a development loan for a project based overseas?

There are a lot of similarities between development and bridging loans, both being short-term finance that can be used for similar purposes. Development loans are drawn down in stages, however, rather than in a single lump sum like a bridging loan.

The way each loan is calculated also differs, with bridging loan lenders focussing on a maximum LTV (loan to value), whereas development finance is based on the GDV (gross development value) of the project.

How does development finance differ from bridging finance?

There are a lot of similarities between development and bridging loans, both being short-term finance that can be used for similar purposes. Development loans are drawn down in stages, however, rather than in a single lump sum like a bridging loan.

The way each loan is calculated also differs, with bridging loan lenders focussing on a maximum LTV (loan to value), whereas development finance is based on the GDV (gross development value) of the project.