What is development finance?
Development finance is a short-term loan used to fund the construction or conversion of residential or commercial property. Funds are drawn in stages as the build progresses, and repaid from the sale of completed units or refinance.
How development finance works
Development finance provides capital for ground-up construction, conversion, or heavy refurbishment projects. Unlike standard mortgages, funds are released in staged drawdowns as the build progresses and the monitoring surveyor confirms work is complete. Interest is typically charged only on drawn funds.
Key metrics: GDV, LTGDV and LTC
Lenders assess development projects using Gross Development Value (GDV) — the estimated value of the completed scheme. Loan-to-GDV (LTGDV) is typically capped at 65% to 70%. Loan-to-Cost (LTC) — the loan as a percentage of total project cost — is usually capped at 85% to 90%. The lower of these two determines your maximum facility.
Typical development finance costs
Monthly interest rates range from 0.65% to 1.25% on drawn funds. Arrangement fees are typically 1.5% to 2% of the total facility. Exit fees of 0.5% to 1% may apply. Monitoring surveyor fees (paid by the borrower) are charged per drawdown inspection. Interest is usually rolled up and repaid at exit.
What lenders look for
Key criteria include: developer experience (number and scale of previous projects), planning permission status, realistic build costs supported by a quantity surveyor report, achievable GDV supported by comparable evidence, viable exit strategy (pre-sales or refinance), and sufficient borrower equity in the project.
The drawdown process
After initial advance (land purchase or day-one costs), you request drawdowns as work stages complete. The lender instructs a monitoring surveyor to inspect the site and confirm the work matches the build schedule. Once approved, funds are released — typically within 3 to 5 working days of the inspection.
Development finance worked example
You are converting a commercial building into 6 residential flats with a total project cost of 1.8M and estimated GDV of 2.8M.
- Total project cost: 1,800,000 (land 600,000 + build 1,200,000)
- GDV: 2,800,000
- LTGDV at 65%: 1,820,000
- LTC at 85%: 1,530,000
- Maximum facility (lower figure): 1,530,000
- Monthly rate: 0.85% on drawn funds
- Arrangement fee (1.75%): 26,775
- Build period: 14 months
- Exit: Sale of 6 completed flats
Developer equity required: approximately 270,000. Total finance cost including rolled-up interest and fees estimated at 140,000 to 160,000 depending on drawdown profile.
FREQUENTLY ASKED
Frequently asked questions
Requirements vary by lender. Some will fund first-time developers for smaller projects (under 1M GDV) with professional team support. Most lenders prefer at least 2 to 3 completed projects of similar scale. Greater experience typically means better rates and higher leverage.
True 100% funding is rare but possible in specific structures — for example, where a mezzanine lender provides a second charge behind the senior lender, or where the land is unencumbered and provides sufficient equity. In most cases, developers need 10% to 25% cash equity.
A monitoring surveyor is appointed by the lender to inspect the development at each drawdown stage. They verify that construction matches the agreed build schedule, assess quality, and confirm the amount that should be released. The borrower pays the surveyor fees.
Typically 3 to 6 weeks from application to completion, depending on planning status, deal complexity and lender capacity. Having planning permission, a full professional team and clear build costs in place speeds up the process significantly.
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Results are indicative and depend on lender criteria, valuation, security, credit profile, exit route and full underwriting.
Results are indicative and depend on lender criteria, valuation, security, credit profile, exit route and full underwriting. Commercial finance may be unregulated. Some property finance can be regulated depending on borrower, property use and loan purpose.