Development finance

Development finance pays for building work on property: a new building from the ground up, or a heavy refurbishment of an existing one. The lender releases the money in stages as the work is done and checked by a monitoring surveyor, and the loan is repaid from the sale or refinance of the finished property. Lenders size the loan against the total cost of the project and against its value once complete.

Start a funding searchFind what fits

How development finance works

A development loan has two parts. The first pays towards buying the site, or refinances a site you already own, on the day the loan starts. The second pays for the build, released in stages as the work progresses. Interest is charged only on the money drawn, and it is rolled up or retained from the facility, so there are no monthly payments while the building is going up. The loan is repaid in one sum at the end, from the sale of the units or from a refinance onto a longer-term loan once the building is let.

Ground-up development means building something new on land, from a pair of houses to a block of flats, a light industrial estate or a care home. Refurbishment covers work on an existing building, from new kitchens and bathrooms to structural work such as converting offices or a barn into homes. Light work that needs no planning permission or building regulations approval can sometimes be funded with a bridging loan. Heavier work with planning permission, structural change or a build programme of many months goes to development finance.

The lender expects your money in the project first. It lends a share of the costs and you fund the rest, so if costs rise or values fall, your money takes the loss before the lender’s does. A loan to an individual to build a home that the borrower or a close family member will live in is a regulated mortgage contract, and is outside the funding search.

Terms used in development finance

Gross development value
What the finished project is expected to be worth, in a valuation the lender commissions. For units to be sold, it is the total of their expected sale prices.
Loan to gross development value
The total loan, including rolled-up interest and fees, as a percentage of the gross development value. It shows the lender’s cushion if sale prices fall.
Loan to cost
The total loan as a percentage of the total costs: site, build, fees, contingency and finance costs. It shows how much of your own money is in the project.
Day-one advance
The part of the loan paid at the start towards the site purchase.
Contingency
A sum in the budget for costs that overrun. Lenders want to see one, set against the risk of the build.
Practical completion
The point at which the work is finished and the building can be used, certified by the architect or contract administrator. It starts the clock on the exit.

How staged drawdowns work

  1. 1

    Before the build

    The monitoring surveyor reviews the plans, the build contract, the cost plan and the programme, and reports to the lender on whether the budget and timetable are realistic.

  2. 2

    Each stage

    When a stage is finished, such as foundations or the roof, you request a drawdown. The surveyor visits the site and checks the work against the plan.

  3. 3

    Certificate and payment

    The surveyor certifies the value of the work done. The lender pays against that certificate, and interest starts on that money.

  4. 4

    Completion

    At practical completion the last drawdown is released, any retention is settled, and the sale or refinance begins.

Lenders pay in arrears, after work is done, so the contractor or you fund each stage first. Plan the cash for that gap. The facility letter says who pays the monitoring surveyor, and the cost belongs in your development budget.

Sizing a development loan

Illustrative example

A developer plans six houses. The site costs £600,000, the build £900,000, and professional fees, contingency and finance costs an assumed £150,000. The assumed gross development value is £2,400,000 and the assumed facility is £1,155,000. The two ratios are worked out for this example only; each lender sets its own limits.

Total development costs
£1,650,000
Gross development value (assumed)
£2,400,000
Facility (assumed)
£1,155,000
Loan to cost: £1,155,000 ÷ £1,650,000
70.0%
Loan to gross development value: £1,155,000 ÷ £2,400,000
48.1%
Developer’s own money: £1,650,000 less £1,155,000
£495,000
Profit before tax if all six sell at the assumed values
£750,000

If sale prices came in 10% lower, the gross development value would fall to £2,160,000 and the profit to £510,000. A build cost overrun of £150,000, with no contingency left, would come off the profit too, and the developer would have to fund it in cash before the lender released the next stage.

Two cleaners loading a vacuum into their van

What a development lender assesses

A development lender looks first at who is running the project. It wants to see what you have built before, at what size and with what result. A first project gets a smaller choice of lenders and lower limits, and a lender may want an experienced partner or project manager on the team.

It also wants the full planning permission with its conditions, a fixed-price build contract with a contractor it can check, a cost plan from a quantity surveyor, an independent valuation of the finished units, and evidence of demand in the area. It will ask the directors of a borrowing company for a personal guarantee.

  • Your track record of completed projects
  • Full planning permission and any planning obligations
  • A build contract, cost plan and programme
  • A valuation and evidence of sales or lettings nearby

What goes wrong on a development

Build costs can overrun when materials and labour prices move, ground conditions turn out worse than the survey showed, or planning conditions add work. The lender will not lend more than the facility, so overruns come out of your contingency and then your own cash. Include section 106 contributions and the Community Infrastructure Levy in the budget from the start; both are set when planning is granted.

When the programme slips, every extra month adds rolled-up interest and may push the project past the facility’s end date, which brings extension fees or the default rate. A contractor that fails mid-build stops the work while you appoint a replacement, at a higher price.

If sale prices fall or units sell slowly, the exit takes longer and repays less. Some developers refinance unsold units with a development exit loan, a shorter bridging-type facility that repays the development lender and gives more time to sell at a lower rate. Build the cost of that into your plans before you start, along with what the scheme looks like if values fall by a tenth.

Questions people ask

How does development finance work?

The lender advances part of the site cost at the start and releases the build costs in stages, each one checked by a monitoring surveyor. Interest is charged on the money drawn and rolled up or retained, so there are no monthly payments. The loan is repaid when the finished property is sold or refinanced.

What is loan to gross development value?

It is the total loan, including rolled-up interest and fees, as a percentage of what the finished project is expected to be worth. A loan of £1,155,000 on a project valued at £2,400,000 on completion is 48.1% of gross development value. Each lender sets its own maximum.

What is loan to cost in development finance?

Loan to cost is the total loan as a percentage of the total project costs, including the site, the build, fees, contingency and finance costs. It shows how much of the money comes from the developer. Lenders apply both a loan to cost and a loan to gross development value limit, and the lower result sets the loan.

What does a monitoring surveyor do?

The monitoring surveyor acts for the lender. Before the build, they review the plans, contract, costs and programme. During it, they inspect each stage and certify the value of work done, which the lender pays against. They report problems with cost, quality or timing to the lender. The facility letter sets who pays their fees.

Can I get development finance for my first project?

Some lenders fund first-time developers, with lower limits and closer conditions. A small project, an experienced contractor on a fixed-price contract, a professional team and a larger share of your own money all help. A partner with a track record can open more lenders.

Is development finance regulated?

Development finance to a company is not regulated. A loan to an individual to build or renovate a home that the borrower or a close family member will live in is a regulated mortgage contract, which needs a regulated adviser and is outside the funding search.

Finance is subject to status and to the lender’s terms. A personal guarantee makes you liable for the company’s debt if it does not repay, and it can be enforced against your own assets, including your home. Nothing here is a personal recommendation.

Assets and property

Commercial bridging loans

A commercial bridging loan is short-term finance secured on property until a sale or a longer-term loan repays it.

Read more →

Commercial mortgages

A commercial mortgage is a long-term loan secured on premises the business uses or a building let to tenants.

Read more →

Business funding for construction firms

How retentions, CIS and the VAT reverse charge shape a building firm’s cash, and the finance that fits.

Read more →

Secured business loans

Borrowing backed by a charge over property, equipment or the whole company, and what the lender can do if it goes wrong.

Read more →
All business funding

Start a funding search

Start a funding search

Funding searches run on Swoop’s platform. Swoop Finance Limited is a credit broker and not a lender, and is authorised and regulated by the Financial Conduct Authority (FRN 936513). Buzz Accounting Ltd introduces businesses to Swoop and may receive a fee from Swoop when funding is arranged. Business funding is separate from the financial advice Equity & General Financial Services Limited gives through this website. Finance is subject to status, and a lender may ask a director for a personal guarantee.

Cover for a personal guarantee

If a lender asks you to guarantee the company’s borrowing, our advisers can advise on life cover for that debt.

Request a meeting