Development Finance for Property Projects

This guide explains how development finance works, how lenders assess projects, how funds are released during construction and what you need to prepare before applying. Development finance is a specialist product used to fund property construction, conversion and renovation projects. It is not regulated by the Financial Conduct Authority, which means the consumer protections that apply to regulated mortgage lending do not apply in the same way.

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For a free initial consultation about development finance, call 01202 155992 or contact Mortgage One.

What Is Development Finance

Development finance is a short-term, interest-only loan designed to fund property development projects. Unlike a standard mortgage, the funds are released in stages, known as drawdowns, as the project progresses rather than as a single lump sum at the outset. The loan is repaid at the end of the project, either by selling the completed properties or by refinancing onto longer-term finance.

Development finance covers both the site acquisition and the construction costs. A related product, construction finance, covers the build costs only and is used when the developer already owns the site. Although the terms are sometimes used interchangeably, the distinction matters because the loan structure and deposit requirements differ.

The product is used for a wide range of projects including ground-up residential development, commercial construction, mixed-use schemes, barn conversions, office-to-residential conversions and large-scale renovation or refurbishment.

How Lending Is Assessed

Lenders assess development finance applications primarily on two metrics: the gross development value and the total project cost.

Gross development value (GDV). This is the estimated market value of the completed development, usually supported by a valuation from an approved surveyor. The GDV determines the maximum the lender is willing to advance across the project as a whole. Most lenders will advance up to 60 to 70 per cent of the GDV, though this varies by lender, project type and borrower experience.

Total project cost. This includes the site purchase price, construction costs, professional fees, contingency and any other costs required to complete the development. Some lenders will advance up to 100 per cent of the construction costs, provided the overall lending stays within their GDV limit and the borrower contributes equity to the site purchase.

In addition to these metrics, lenders will assess the borrower’s development experience, the viability of the project plan, the planning position, the expected timeline and the exit strategy.

How Drawdowns Work

Development finance is released in stages as the build progresses, not as a lump sum. The lender appoints a monitoring surveyor who inspects the site at each agreed stage and confirms that the work has been completed to the required standard before the next tranche of funds is released.

The schedule of works, agreed between the borrower and the lender at the outset, sets out the stages, the amount to be released at each stage and the expected timeline. Typical stages include site purchase, demolition and groundworks, substructure, superstructure, wind and watertight, first fix, second fix and completion. The monitoring surveyor’s role is to protect both the lender and the borrower by ensuring the project stays on track and the funds are being used as intended.

Interest on development finance is typically rolled up or retained from the facility rather than paid monthly. This means the interest accrues during the build and is repaid along with the capital at the end of the project. The total interest cost should be factored into the project appraisal from the outset.

To discuss your development project and financing options, call 01202 155992 or contact Mortgage One.

Deposit and Equity Requirements

Development finance lenders typically require the borrower to contribute equity to the project, usually in the form of a cash deposit towards the site purchase. Deposit requirements for the site purchase generally range from 25 to 40 per cent of the site value. Some lenders will accept alternative security, such as equity in other properties, to reduce the cash contribution required.

The overall loan-to-cost and loan-to-GDV ratios determine how much the lender will advance. A typical structure might involve the lender funding 70 per cent of the site purchase and up to 100 per cent of the build costs, subject to the total lending not exceeding 65 to 70 per cent of the GDV. The borrower funds the balance.

Exit Strategy

Every development finance application requires a clearly defined exit strategy, which is the plan for repaying the loan once the project is complete. The two most common exit strategies are:

•       Selling the completed units. For speculative residential developments, the exit is usually the sale of the finished properties. The lender will want to see evidence that the projected sale prices are realistic, supported by comparable evidence from the local market.

•       Refinancing onto longer-term finance. For developments that will be retained as rental properties, the exit is typically a remortgage onto a buy-to-let mortgage or a commercial mortgage. Mortgage One’s buy-to-let mortgage guide explains the criteria for BTL lending, which is relevant when planning a refinance exit.

Some developers use development exit finance, a short-term bridging product, to repay the development loan quickly while the completed units are being marketed for sale. This can release the development facility for the next project. Mortgage One’s bridging loans guide explains how short-term secured lending works.

Mezzanine Finance

Requests for mezzanine finance are by referral only.

Mezzanine finance is a secondary layer of lending that sits behind the senior development finance, filling the gap between the senior loan and the borrower’s own equity. It is typically structured as a second charge loan and carries a higher interest rate than the senior facility to reflect the additional risk.

Mezzanine finance can be useful for developers who want to reduce the cash equity they need to contribute to a project or who want to stretch their equity across multiple schemes. However, the combined cost of senior and mezzanine lending increases the total finance cost, which must be factored into the project appraisal. Mortgage One does not advise on or arrange mezzanine finance directly but can refer you to a specialist provider where appropriate.

Development Finance Versus Self-Build Mortgages

For smaller, single-unit residential projects where you intend to live in the completed property, a self-build mortgage may be more appropriate than development finance. Self-build mortgages are regulated products with lower rates and longer terms, but they are designed for owner-occupier projects rather than speculative development. Mortgage One’s self-build mortgage guide explains the stage payment structure and lender criteria for self-build projects.

For projects involving multiple units, commercial elements, or where the intention is to sell the completed properties rather than occupy them, development finance is the appropriate product. If the completed properties will be held as a portfolio, Mortgage One’s limited company buy-to-let guide explains how company structuring works for retained rental properties.

How Mortgage One Can Help

Development finance is a specialist area with a relatively small number of active lenders, many of which are only accessible through a broker. As a whole of market mortgage broker, Mortgage One can identify lenders that match the project type, size, location and borrower experience involved in your scheme.

This includes helping you prepare the project appraisal, schedule of works and exit strategy documentation that lenders require, identifying the most appropriate lending structure and ensuring the drawdown stages align with your construction programme. If the exit involves refinancing onto BTL mortgages, Mortgage One can coordinate both the development finance and the exit lending as part of a single advice process.

For expert guidance on development finance, call 01202 155992 or contact Mortgage One.

The information provided in this article is for general guidance only and does not constitute personal or regulated financial advice. If you’d like to understand what these moves could mean for you, speak to Mortgage One. We can explain your options and timings based on your specific circumstances.

Some Buy to Let mortgages are not regulated by the Financial Conduct Authority.

FAQs

1. What is development finance?

Development finance is a short-term, interest-only loan used to fund property construction, conversion or renovation projects. Funds are released in stages as the build progresses and the loan is repaid at the end of the project, either by selling the completed properties or refinancing onto longer-term finance.

2. Is development finance regulated?

No. Development finance is not regulated by the Financial Conduct Authority. This means the consumer protections that apply to regulated residential mortgage lending do not apply in the same way.

3. What is gross development value?

Gross development value, or GDV, is the estimated market value of the completed development. Lenders use the GDV as the primary metric for determining how much they are willing to advance. Most lenders will lend up to 60 to 70 per cent of the GDV.

4. How much deposit do I need?

Deposit requirements for the site purchase typically range from 25 to 40 per cent. Some lenders will accept alternative security to reduce the cash contribution. The overall lending is also limited by the loan-to-GDV ratio.

5. How is interest charged on development finance?

Interest is typically rolled up or retained from the facility rather than paid monthly. The total interest accrues during the build and is repaid along with the capital when the project completes.

6. Do I need development experience?

Many lenders prefer borrowers with a track record in property development, but some will consider first-time developers, particularly for smaller or less complex projects. Experience requirements vary by lender.

7. What is mezzanine finance?

Mezzanine finance is a secondary layer of lending that sits behind the senior development loan, filling the gap between the senior loan and the borrower’s own equity. It carries higher rates and is arranged by referral through Mortgage One.

8. What is the difference between development finance and a self-build mortgage?

Self-build mortgages are regulated products designed for single-unit owner-occupier projects. Development finance is an unregulated product used for larger, speculative or multi-unit projects where the intention is to sell or let the completed properties.