Development Finance Guide:
Funding Your Property Project

Development Finance: A Complete Guide to Funding Your Property Project

If you're planning a building project—whether it's a new construction or a significant renovation—development finance could be the perfect solution to fund your venture. In this guide, we’ll explain everything you need to know about how these loans work, how to secure financing, and how to get expert support to find the best rates for your project.

What is Development Finance?

Development finance is a type of short-term, interest-only loan, similar to bridging finance. The key difference lies in how the funds are released. Rather than receiving a lump sum, development finance is paid out in stages, known as drawdowns, as the project progresses. This makes it a preferred option for property developers, investors, and landlords working on residential, commercial, or mixed-use properties.

Is Development Finance the Same as Construction Finance?

Construction finance is a subset of development finance, focusing solely on the construction phase of a project. Development finance covers both the site purchase and construction. Although the terms are sometimes used interchangeably, construction finance is strictly related to the building phase.

Lenders typically base affordability for construction finance on the Gross Domestic Value (GDV)—the expected value of the property after development—along with estimated project costs.

How Development Finance Works

Funds are released in stages as your project progresses, with the lender conducting regular site inspections. This ensures that the development stays on track according to your schedule of works (SOW). You’ll need to demonstrate a viable exit strategy—usually selling or refinancing the property to repay the loan once development is complete.

One of the key advantages of development finance is the ability to borrow larger amounts, which can be used for both land purchases and construction. However, terms and conditions for each type of use may vary.

Eligibility Criteria and Deposits

Eligibility depends on your individual circumstances and the details of the project. Some key considerations include:

• Deposit Requirements: For site purchase, lenders typically require a deposit between 25% to 40%, which translates to a loan-to-value (LTV) of 60% to 75%. Some lenders may provide 100% LTV on development costs if you can offer additional assets as security.

• Exit Strategy: A well-defined plan for repaying the loan is crucial. This could involve selling the property or securing long-term financing.

• Development Experience: Lenders may prefer borrowers with a track record in property development, though some will consider first-time developers.

• Loan Terms and Interest Rates: Rates can be fixed or variable, and terms typically range from 3 to 36 months. Rates are higher for development finance due to the risks involved, so selecting the right lender is essential.

• Type of Development: Some lenders specialise in particular sectors, such as residential, commercial, or first-time developer projects.

How to Secure Development Finance

Your first step should be to consult an experienced broker who specialises in development finance. A broker can assist with:

• Business Plan & Exit Strategy: Your broker will help you prepare the necessary documentation, including a schedule of works and an exit strategy.

• Calculating Loan Amounts: The broker will assist in determining the loan size based on your project’s GDV and associated costs.

• Finding Lenders: Brokers have access to specialised lenders and can help secure the best terms for your project.

Use a Broker

A development finance broker like Mortgage One has long relationships with every Lender in the space and will find you the best deal. It is always worth a no-obligation conversation

Types of Developments You Can Finance

The types of projects eligible for development finance are diverse, ranging from residential buildings (e.g., apartments or multi-unit properties) to commercial developments like offices, retail spaces, and industrial units. It can also cover renovation, conversion, or ground-up development.

How Much You Can Borrow

Lenders usually determine borrowing limits based on the GDV and project costs. Loans typically cover 70% of the GDV and up to 100% of the construction costs. The smallest loans start at £50,000, while larger development projects can secure up to £50 million.

Development Finance Lenders

Specialist lenders like Paragon Bank, BLG, and Aldermore Bank provide development finance with varying loan amounts, interest rates, and LTVs. Many niche lenders offer bespoke financing options, often accessible only through broker introductions.

Examples of Interest Rates

Interest rates for development finance vary widely, from 6% to 16%, depending on factors like project size, risk, and lender choice. To get the best rates, it’s crucial to work with a broker who understands the market.

Using Mezzanine Finance

Mezzanine finance can complement development finance by covering funding gaps when a primary lender can’t provide the full amount. It’s typically used as a second-charge loan and is a flexible option for larger projects.

Alternative Financing Options

If development finance doesn’t suit your project, other options include:

• Joint Ventures: Partnering with an experienced developer.

• Commercial Loans: Standard business loans for land and site purchases.

• Equity Release: Refinancing an existing property to fund new projects.

• Bridging Loans: Short-term finance that can be used alongside development finance.

Speak to a Specialist

Financing property developments is complex, but the right advice can make all the difference. To explore your options, speak to a Mortgage One advisor today and find the most suitable financing solution for your project.