Development finance
Property development requires a huge amount of upfront capital. A property developer will typically take advantage of financial leverage and use development finance to fund the project.
What is development finance?
Development finance is a short-term funding solution designed for property development projects, including residential development, commercial development finance, and infrastructure development finance. It provides developers with the capital needed to purchase land, fund construction costs, and cover associated expenses. Development finance lenders assess projects based on their potential rather than just their current value, making it an essential tool for property developers looking to expand their portfolios.
How Does Development Finance Work?
Unlike traditional mortgages, which are based on the existing value of a property, development finance is structured around the projected Gross Development Value (GDV). The loan amount granted depends on factors such as the Loan to Value (LTV) ratio, the viability of the project, and the developer’s track record. Developers receive funds in stages as the project progresses, reducing risk for the lender and ensuring funds are allocated efficiently. Development finance is typically repaid once the project is completed and sold, refinanced, or transitioned into an investment property.
Below is the typical process for development finance:
Prepare
Gather as much detail as you can on the proposed development, including the market demand and projected financials.
Apply
Submit a formal application, outlining your development plans and giving all the financial details you can.
Valuation
All lenders will do an independent valuation of the property or construction site when considering your application.
Approval
You will receive a decision on whether funding has been approved. We will outline how much you will receive and the timescale for receiving the funds.
Initial funds arrive
Payments are usually released at different stages of the build. The initial amount will likely cover the purchase price of the land or building, with subsequent payments covering the cost of the works.
Repaying the loan
The loan must be repaid when the project is completed and sold or refinanced.
The Different Types of Development Finance
Designed for building or renovating houses, apartments, or mixed-use developments, this type of finance helps property developers fund projects aimed at private buyers or rental markets.
- Senior Debt – A primary funding option for residential property developments, covering land acquisition and construction costs. Lenders typically finance up to 65% of the Gross Development Value (GDV).
- Mezzanine Finance – A secondary loan that bridges the gap between senior debt and developer equity, allowing greater borrowing flexibility without losing ownership.
- Stretched Senior Debt – Offers higher leverage than traditional senior debt, increasing the Loan-to-Value (LTV) ratio but at higher interest rates.
- Bridging Loans – Short-term funding to help developers sell the property or transition to a long-term mortgage after project completion.
Development Exit - Finance – Helps refinance existing development finance, providing additional time to sell residential property and improve cash flow.
Used for large-scale projects like office buildings, retail spaces, and industrial units, commercial development finance supports infrastructure growth and business expansion.
- Senior Debt – A cost-effective financing option for commercial developers, covering major expenses such as infrastructure development finance and construction.
- Mezzanine Finance – Fills the funding gap in commercial development finance, allowing developers to borrow beyond senior debt limits while reducing upfront capital investment.
Joint Venture - Funding – Ideal for commercial developers who partner with investors, sharing profits instead of taking on full financial risk.
- Bridging Loans – A short-term solution used in commercial projects when awaiting long-term funding or project completion.
Development - Finance Lenders – Specialized lenders provide tailored funding solutions for both residential and commercial property development projects.
Thoughts from Matt
“Got aspirations to be a property developer? Development finance will help you on your way.
But it’s not for the faint-hearted. Development finance is used for big building projects and you will likely face many complexities and delays on the way.
Ideally, you will have had plenty of experience in property renovation before you apply for development finance. If you’ve got any questions, speak to a member of our team and we can talk you through your options. “
Matt Haycox
Founder and CEO, Funding Guru
What Do I Need When Applying for Development Finance?
To secure development finance, applicants must provide:
Detailed Project Plans
Gather as much detail as you can on the proposed development, including the market demand and projected financials.
Financial Projections
A breakdown of costs, contingency planning, and exit strategies
Previous Experience
A track record of successful property development projects enhances credibility with lenders.
Planning Permissions
Evidence that all necessary permissions and approvals have been obtained.
A Relationship Manager
Many lenders require a dedicated relationship manager to oversee the financing process and ensure compliance.
How much can I borrow through development finance?
Development finance is offered by banks, building societies and alternative finance providers such as Funding Guru.
For the right project you can typically borrow up to 70-80% of the land cost, and 100% of the build cost.
The funding is likely to be short-term, and you are expected to repay the loan when the project is completed. The exit route will usually be from either a sale of the development or a refinance of it on to a long term mortgage.
Because the property you are building or renovating does not yet exist in its end form, we will consider the projected future value of the property as well as the cost of the project.
When considering how much to lend you, Funding Guru takes into account:
-
Loan to cost (LTC):
This covers the overall costs relating to the project, including purchase price, stamp duty, legal fees and build costs -
Loan to gross development value (LTGDV):
The overall estimated end value on the open market -
Your track record in construction:
Have you had successful developments in the past? -
Your credit rating:
This indicates your ability to repay the loan on time -
The size of your deposit:
You will be required to put down a deposit of at least 20% of the site’s value, and likely more
Got a funding shortfall?
If your chosen lender won’t loan you as much as you need, you could consider mezzanine finance.
Mezzanine finance provides you with top-up funding needed to meet the required development costs.
It is a short to medium term loan, made to bridge a funding gap and to get a development moving.
For example, a lender may only be prepared to provide 70% of the required funds for your property development. You are able to contribute 10%, leaving a 20% shortfall.
Mezzanine finance can provide that remaining 20% as a loan that charges a rate of interest and potentially involves an equity share in the project.
A hybrid of debt and equity finance, mezzanine finance appeals to those who want to retain control while lowering their own capital investment.
How to repay development finance
At Funding Guru, we expect borrowers to have a clear plan of how they will repay the loan.
Your options are:
- Sell the finished property or properties once completed
- Apply for a longer-term commercial mortgage
- Refinance through a development exit bridging loan, allowing you to start a new project
Most providers of development finance roll up the interest charges, so borrowers pay the interest when they repay the loan. This assists with cashflow as typically there will be no incoming cash until the project is sold at the end once the development is complete.
Pros of development finance
Development finance can help you achieve your goal of becoming a property developer, and below are the main benefits of this type of borrowing.
Property development is expensive. Borrowing money means you can finance a big project without having to fund it all from your firm’s own cash.
You do not have to wait for an existing project to finish before starting a new one. A bridging loan could be used to fund another project while waiting for an existing property sale to complete.
Financial leverage is key to funding big property developments. By building a property or development that is in high demand, you would get a decent return on your capital to put towards other projects.
Cons of development finance
Property development is not for everyone – it can be a stressful experience and potential borrowers should be aware of the risks.
Development finance is much more complex and specialised than standard mortgages, meaning you will face additional paperwork and higher fees and interest rates.
There are likely to be delays in the construction and building work, which could put pressure on timescales and your ability to repay the loan by its deadline.
You will be required to offer the property or loan as collateral, meaning that if you can’t meet the loan repayment terms your assets are at risk.
What Are the Costs Involved in Development Finance?
Development finance is a short-term funding solution designed for property development projects, including residential development, commercial development finance, and infrastructure development finance. It provides developers with the capital needed to purchase land, fund construction costs, and cover associated expenses. Development finance lenders assess projects based on their potential rather than just their current value, making it an essential tool for property developers looking to expand their portfolios.
Interest: Interest is typically charged monthly and is only payable on the funds that are actually drawn down from the loan, not the full loan amount.
Lender Arrangement Fee: Many lenders charge an arrangement fee to cover the costs of underwriting and conducting credit analysis when setting up the loan.
Professional Fees: Depending on the scale of the project, costs for professionals like solicitors, architects, and project managers can add up. These fees may often be included in the development finance loan.
Valuation Fees: To estimate the Gross Development Value (GDV) of a project, lenders usually require an independent third-party valuation. This is a standard cost to assess the project’s potential.
Monitoring Fees: Lenders may charge monitoring fees for tracking the progress of the development to ensure the project is on schedule and funds are being used properly.
Exit Fees: These fees, which vary between lenders, are typically charged at the end of the loan term and are calculated as a percentage of the total repayable loan sum.
Broker Fees: If a broker is involved in arranging the development finance, a fee will likely apply for their services.
Non-Utilisation Fees: If a lender reserves funds for a project but the funds are not used immediately, they may charge a non-utilisation fee to compensate for keeping the capital unavailable for other lending opportunities.
These costs should be considered carefully when planning for development finance, as they can impact the overall budget and profitability of the project
What is development finance?
Contact Us
Speak to Funding Guru about how our property development finance can get your project off the ground and make your vision a reality. Whether we provide funding ourselves or introduce you to a more suitable funding partner, we can advise you throughout the process.