Guides - What is Development Finance?
Updated: Apr 18
Development finance is for larger scale residential or semi-commercial projects, including ground-up builds and conversions. Loan amounts of several million pounds are not unusual.
As these schemes are more complex and can range from 18-36 months with interest typically rolled up and paid at term, loan amounts of several million pounds are not unusual. Usually split into an upfront loan for the purchase of the asset and a second loan for costs which is drawn down in pre-agreed stages as work is completed and signed-off by an independent project-monitoring surveyor.
A maximum of around 75% of the total loan to gross development value (LTGDV) can be borrowed. The value is decided based on the estimated value of the property once the development has been completed. This differs from the more common loan-to-value (LTV) ratio used in Bridging and Buy-to-Let lending, which is calculated on the current value of the security.
By providing a detailed schedule of works in advance with costs broken down, it is often possible to secure 100% of the cost of works, alongside the loan for the asset.
Development finance can be cheaper than bridging but it is more expensive then other forms of property finance such at term mortgages. The higher interest rate charged by the lender reflects their risk as the project progresses through to completion.
On completion, the property value will go up and you will then have the option of transferring to a lower cost loan, while awaiting sale of the units. This is known as a Development Exit loan.
The repayment is geared to the sales plan for the project including the timing of planned sales and will take into account what proportion of the proceeds you may be able to retain at each stage. If you are selling units, the lender is likely to want you to use proceeds from the first unit sales to reduce the outstanding balance until the loan gets to the point of being 60% or less of the value of the security.
Refurbishment Finance is used when completing light to heavy refurbishments of a residential property, with or without the need for planning permission or building regulation approval. This can include converting a commercial property into a residential one.
Your lender will want to know your previous project experience. A track record of past successes of similar schemes will enhance their confidence, or if lacking personal experience, having access to the skills of a capable team.
You must be able to demonstrate a realistic exit strategy. There are only two options and the bridging lender will want to see that you have a clear exit strategy in mind:
a) Sell the property
b) Refinance onto a Term mortgage
Development loans are expensive compared to a mortgage. You can expect to pay between 0.4% to 1.2% interest per month, depending on a variety of factors including size of the loan, loan-to-gross-development value (LTV), loan-to-cost (LTC) duration, experience of the investor and build team and credit rating of the borrower.
There are lenders that can disburse the money very quickly, but these tend to be more expensive. In addition to interest fees, there are also other facility costs that you need to be aware of, including:
Arrangement Fee: Charged by the lender for providing the facility, typically around 2% of the value of the gross loan. Exit Fee: Charged by the lender when exiting the facility. Not always applied, but if there is one, expect to pay up to 1.5%.
Administration Fee: Charged by the lender to cover the paperwork and other disbursement costs.
Legal Fees: You are expected to cover both your own and the lender’s legal fees. These are charged on the value of the property and expect to pay upwards of £1,200 + VAT.
Valuation Fees: This is another fixed fee, paid to the Valuer chosen by the lender determined by property value, depending on the project expect fees upwards of £500 + VAT. QS / Asset Manager Fees: As development funds by their nature involve building and refurbishment the lender will engage a QS to monitor the site both in the beginning and as each stage completes. They will charge to visit and ensure the build is proceeding according to plan and maintaining the expected quality levels. Site visits can cost upwards of £500 per visit. These costs are often built into your loan.
Your broker may also charge fees. We charge nothing for initial quotes and advice up front. Once you select a lender and proceed to application it's £199 and then on formal offer post valuation it's 0.5% of the gross loan.
With over 199 lenders we work with - with Finanze, it’s personal. Providing bespoke solutions for bridging, buy to let, development finance and commercial mortgages for private and corporate clients.