This article is for general information only and does not constitute financial advice.
Development finance is short-term lending for ground-up construction projects or major refurbishments that add significant value. It operates differently from a standard BTL mortgage. Funds are released in stages as the build progresses, and the loan is repaid when you sell the completed units or refinance onto a long-term product.
Interest rates run from 7% to 12% per annum depending on the lender, the borrower's experience, and the project's risk profile. Arrangement fees add 1% to 2% of the facility. Exit fees (0.5% to 1%) may also apply.
How it works
You apply for a facility based on the total project cost (land purchase plus build costs plus professional fees). The lender offers a facility up to 70% to 80% of total costs (loan-to-cost, or LTC) and up to 65% to 70% of the gross development value (LTGDV, the estimated value of the completed project).
The loan draws down in tranches. A typical schedule:
Day one: the lender funds part or all of the land purchase. Build phase: you submit invoices or stage completion certificates. A monitoring surveyor (appointed by the lender, paid for by you) inspects the work and certifies each stage. The lender releases the next tranche against the surveyor's sign-off. Completion: you sell the finished units or refinance, repay the loan plus rolled-up interest, and keep the profit.
Interest is usually "rolled up" rather than serviced monthly. You do not make monthly interest payments. Instead, the accrued interest is added to the loan balance and repaid at exit. This preserves cash flow during the build but means the total interest cost is higher than it first appears.
What lenders assess
Experience. First-time developers face higher rates and lower LTV. Most mainstream development lenders want to see at least one completed project. If you have no track record, a joint venture with an experienced developer or a smaller lender willing to take a risk on inexperienced borrowers (at a premium) are the usual routes.
Planning status. Full planning permission or prior approval in place is the baseline. Some lenders will consider applications at the pre-planning stage, but terms will be less favourable.
Build cost estimate. The lender's monitoring surveyor reviews your build cost breakdown and flags anything that looks unrealistic. Contingency of 10% to 15% on build costs is standard.
Exit strategy. The lender wants to know how you will repay. For residential schemes, this means comparable sales evidence showing that completed units will sell at the values in your appraisal. For a refinance exit, evidence that the completed units will meet BTL mortgage criteria.
Cash contribution. Most lenders require 20% to 30% of total project costs as the developer's own cash. Some accept land equity if you already own the site.
Costs to budget
| Cost | Typical range |
|---|---|
| Interest rate | 7% to 12% per annum |
| Arrangement fee | 1% to 2% of facility |
| Exit fee | 0% to 1% |
| Monitoring surveyor | £500 to £1,500 per inspection |
| Legal fees (lender's solicitor) | £3,000 to £8,000 |
| Valuation | £1,500 to £5,000 |
On a £500,000 development facility over 12 months at 9% with a 1.5% arrangement fee, total finance costs are approximately £52,500 (interest) plus £7,500 (arrangement fee) plus monitoring and legal costs. Budget £65,000 to £75,000 for finance costs on a project of that scale.
Development finance vs bridging
Bridging loans and development finance serve different purposes. Bridging is for acquisitions (buying a property quickly, light refurbishment, then selling or refinancing). Development finance is for projects where significant construction work changes the property's form, not just its condition.
If you are buying a house, refurbishing the kitchen and bathrooms, and selling it on, that is bridging territory. If you are converting a commercial unit into four flats with structural work, new services, and building regulations sign-off, that is development finance.
Some lenders offer hybrid products that bridge the acquisition and fund light development under a single facility. These suit smaller conversion projects (sub-£500,000 total cost) where the work programme is straightforward.
Sources
- UK Finance. https://www.ukfinance.org.uk/ [Accessed 6 May 2026]