Property development finance

What is development finance?

Development finance is a short-term loan for property projects. It can help fund the building of new properties or the renovation of old ones. You can use it for developing both residential property and commercial buildings. 

Borrowers typically use it for construction projects that are bigger and more expensive than standard property refurbishments. As a guide, we recommend that projects costing over £250,000 use development finance rather than refurbishment finance.

How does finance for property development work?

Designed to help with a property development project's purchase and build costs.

Development finance is different from other types of property finance as they typically release the funds in stages. These stages are based on key points in the development project and helps lenders track spending and the progress of your project. 

Ultimately, they need to be sure you’re using their money for what you’ve said you will!

For large-scale projects, the release of funds is subject to independent monitoring surveyor (IMS) sign-off. Your lender will use these surveyors to ensure the works are on time and within budget.

Some lenders will release the whole loan at once for smaller development projects.

Our team of expert development finance brokers will advise you on how different lenders will approach your project.

How do lenders assess development loan applications?

To submit a finance application for a development project, you’ll need:

• Proof of relevant property development experience or an suitably qualified team working with you.
• A thorough and costed project plan, including materials, labour, fees and contingency.
• Personal and, if required, business bank statements. Your lender will assess your financial credibility, including your credit history, income, and other debts.
• Proof of planning consent (if applicable)

Your lender will need to know details of the properties you intend to build, or the current state of existing buildings you plan to develop. 

Lender criteria can differ. The type of property and its demand in the area will be important for your application. Ultimately, lenders must be satisfied that you have a secure exit strategy to repay the development loan.

How much can I borrow?

The amount you can borrow is based on a percentage of the gross development value (GDV) at the end of the work. 

Typically, lenders can lend up to 70% of the GDV and a maximum of 85% of the total costs. Standard development loans are a minimum of £250,000, with no absolute upper limit. Loans are usually structured so that the developer invests their contribution up front, while the lender covers most, if not all, of the construction costs. Funds are then usually taken out in stages based on the architect's or quantity surveyor's certificates.

Example:

A developer has planning permission to build three houses with a gross development value estimated at £4.5 million. The total costs involved are £3.1 million; £1.25 million for purchasing the land and £1.85 million for funding the build costs. A lender might agree to construction finance of £2.325m (limited to 75% of costs) structured as £475,000 initial advance. The remaining balance will be given in stages during the building process.

Projected gross property development values will influence loan-to-project costs, but funding is available for up to 85% of the purchase and build costs.

You can get a loan to cover up to 100% of property development costs. This is possible if the borrower owns the land outright.

Where the property developer can improve the planning consent post-acquisition, we can often negotiate increased levels of funding that recognise higher land and gross development values.

How much you can borrow will depend on the strength of your project proposal. The quickest way to determine how much you can borrow is to speak to one of our expert development finance brokers.

Who can apply for property development finance?

Technically, you can apply for development finance as an individual, Limited Company, Limited Liability Partnership (LLP) or Trading Limited Company. 

What makes development finance slightly different from other forms of property funding solutions is that your experience is essential to the success of your application. You’re unlikely to secure a development loan for a substantial ground-up development of a block of flats without any previous development or refurbishment experience.

Generally, the advice is to start small and work up to larger projects. A strong record of completed developments on your CV increases your chances of securing better terms with your lender, as lenders will consider you less of a risk.

How long does it take to get development finance?

This will depend on the complexity of your build project. However, in our experience, development applications move through to completion in between two and four months.

Development finance exit options

As a short-term finance option, your lender will want to know how you plan to repay the loan when you apply. These development finance exit options may include:

• Selling the development
• Refinancing the developed property onto a standard mortgage. Depending on your development, this could be a homebuyer, buy to let or commercial mortgage.
• Selling and refinancing. If If you have built several units, you may wish to sell some and keep others as buy to let or commercial investment assets.