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A Guide to Development Finance

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Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: June 23, 2022

Whether you’re planning to build a fleet of new homes or regenerate an old building into office spaces, taking out property development finance can turn your project dreams into a reality. But how does this type of loan work, is it the best way to fund your project, and how much could you realistically borrow?

We’ve written this guide to answer all these questions and more, providing you with the right information to prepare you before you set off.

What is property development finance?

Property development finance is a loan which developers, landlords or investors can take out on a short-term, interest-only basis to complete their projects if they’re short on funds. With it, you can purchase land and fund the construction of a new building or repurpose an existing one. Either way, the buildings can be used for residential, investment or mixed-use purposes.

This type of finance draws many similarities to bridging loans, however, one of the main things that sets them apart is the way they’re paid out. For property development finance, the funds are released in staged drawdowns as the project progresses, and most lenders carry out re-inspections of the site before issuing each instalment of capital, to make sure the schedule of work (SOW) is progressing as planned.

In order to get development finance loans in the UK, the borrower would need to evidence a viable exit strategy, i.e. a means of repaying the debt at the end of the term. This would usually be through a remortgage or the sale of the development post-completion.

Loan-to-value ratios and deposit requirements

If you need property development finance to cover both the initial bridge for the purchase of the site and the developments costs, most lenders could let you borrow 60% to 75% of the site’s value, known as the loan-to-value (LTV), then 100% for the development costs, which is then released in stages as your build progresses.

Lenders usually work out what they’re willing to offer based on the project’s loan-to-gross development value plus the cost, then offset the current value of the security against the site’s post-development value.

It may be possible to get a development finance loan that covers 100% of the purchase cost if you’re able to put up extra security, such as properties or assets you already own and hold equity in. Under these circumstances, some lenders might also request a profit share agreement.

For more information on how to qualify for a larger loan, make an enquiry. We’ll then put you in touch with a specialist development finance broker who can view your development plans and provide you with an honest and realistic insight into what options may be available.

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How to qualify for development finance

Property development finance is typically offered on a case-by-case basis, so the criteria to qualify for one person may not be the same for you. There are no hard and fast rules about eligibility and affordability that apply across the board, but lenders prefer borrowers who can satisfy certain conditions in order to offset any risk posed.

These are:

  • A strong exit strategy: In order to get a development finance loan, you will need to evidence a viable exit strategy in advance. This would usually be a remortgage or a sale of the development post-completion. The lender will need to be confident that your exit plan will generate enough capital to pay off the debt at the end of the term.
  • Experience in property: Experience in property is not essential as there are lenders who cater for first-time developers, but a strong track record in the relevant industry will almost certainly help convince the finance provider that your plans are achievable. Some lenders might insist on experience if it’s a complex development project.
  • Clean credit: A spotless credit rating is not essential to secure finance for property development as most development finance lenders are unregulated and can, therefore, take a flexible stance to what they will and won’t accept. Although having bad credit is only an issue if it puts the exit strategy at risk, clean credit will almost certainly help convince the provider that the deal is low risk.
  • A healthy deposit/good security: Although most development finance lenders will cap the loan to value (LTV) ratio at 70-75% for the purchase funds, putting down an extra deposit or additional security can help lower any perceived risk.

When assessing loans for property development in the UK, development finance lenders will be keen to see that your plans are achievable, and they will determine that by taking a broad view of the case, looking into the factors listed above as well as other variables, such as the expertise of the team that will be handling the development work itself.

Term lengths

Development finance loans are usually offered on a short-term basis and generally range between three months and three years. Lenders will likely tailor the repayment timeframe to the nature of the project, making allowances for things such as sale and marketing, or a refinance period after the works are complete, so the exit strategy can be executed.

How much can I borrow?

The amount a development finance lender is willing to offer you will largely be based on the viability of the investment and the strength of the exit strategy. Many lenders will set a minimum borrowing amount of £50,000, though some could go lower. Other lenders will only offer their most favourable interest rates for loans between £500,000 to £750,000.

At the upper end of the scale, there is no set limit on how much a development finance lender will let you borrow, as long as you evidence a strong exit strategy that is likely to recoup that amount and cover the interest. Multi-million-pound deals are not uncommon.

Interest rates

Interest rates on development finance deals are typically higher than mortgages, so it’s important that you find the best ones available to you. In order to do this, you’ll need to meet the lender’s affordability requirements, though the criteria will differ from lender-to-lender.

However, approaching lenders individually is not the best way to go about raising finance for property development, as making too many applications can have a negative impact on your credit file, not to mention the amount of legwork this would involve.

Before taking out any loan for property development, it’s important to be aware of all the costs that will be involved, so you should familiarise yourself with how interest is charged on development finance. The good news is that you’ll only be charged interest on the funds you have drawn down, and not the capital that’s due to be released at a later stage.

While this may come as a relief, borrowers should also be mindful of how much the lender will charge for any future site inspections, which are usually required ahead of each funding stage. There’s little point taking a low-interest deal if you’re paying excessive amounts here.

The best way to ensure you end up with favourable rates is to use a specialist development finance broker..

Other options for financing property development

If you feel that property development finance may not be right for you and you’re interested in exploring the alternatives, there are similar products out there which may work better for your needs and circumstances.

These could include:

  • Bridging loan
  • Business loan
  • Mezzanine finance
  • Release equity
  • Joint venture

We’ve taken a brief look at each type of finance in the sections below.

Bridging loan

Bridging finance shares many similarities with development finance, but the main difference between these products is that payments are not staged with bridging.

Although there are circumstances where a bridging loan could serve as an alternative to development finance, the two products are occasionally used in conjunction with one another. Some borrowers use bridging to purchase a site that does not have planning permission in place, with a view to applying for development finance once it’s granted.

Since development finance includes funds for the construction itself, securing the site via bridging can be a more viable option, in case planning permission is difficult to obtain.

Bridging loans are a potential alternative to development finance if you have your own capital for the development works but need funding quickly to purchase the site.

However, development finance would usually be chosen over a bridging loan if the project is large in scale (tens of thousands and up) or a ‘from-the-ground-up’ construction scheme.

Business loan

While development finance is more commonly used for construction projects than commercial loans, there are scenarios where business loans might be a potential alternative.

If the borrower can afford the monthly repayments on a business loan and has the capital for the construction work itself, a commercial loan could be used to purchase the site. This form of lending could also be a fallback solution if the works are likely to take a long time – shopping centres and hotels, for example, can take several years to build.

Unsecured business loans are available for amounts of up to £25,000, so they could be a viable option to fund a development project if you need extra capital to supplement funds you already have, and would prefer to borrow on an unsecured basis.

Standard bank loans for property development could also provide an alternative to development finance, in the same way as commercial loans.

Mezzanine finance

Mezzanine finance is not a substitute for development finance per se, but it can serve as ‘top-up’ funding when used in conjunction with it, and this can be vital for large projects.

This form of borrowing is a middle ground between debt and equity finance, acting as a second charge facility that sits behind the first charge development finance loan.

Mezzanine finance loans usually start at £250,000 and go up to 75% of the loan-to-gross development value and 90% of the cost, leaving 10% for the borrower to foot.

Release equity

If you currently have a commercial mortgage or asset finance agreement, one alternative way to raise funds for your property development project would be to refinance any existing financial agreements. This can release equity (assuming you hold some in the property/asset in question), which can serve as capital to invest in a new property.

Joint venture

Joint venture development finance is an alternative way to take out a development finance loan with zero deposit. Instead, the lender takes a profit share at the end of the development.

A typical joint venture deal would see the provider offering 100% of the purchase price and build costs, charging interest at a higher rate, and claiming a profit share of between 40% and 50% at the end. It is common practice for the lender to set up a special purpose vehicle in both parties’ names and oversee the project’s ongoing development.

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Peer-to-peer development finance lending

Peer-to-peer lending does exist in the development finance sector, but only on a small scale at present and some brokers are cautious when it comes to arranging these deals. With this in mind, it’s always recommended that you seek specialist advice before pursuing a peer-to-peer development finance deal. Get in touch for a free, no-obligation chat about your options.

How to get your finance underway

First of all, you should decide whether you need to take out development finance to fund your venture, though the advisors we work with can help you with this and can recommend alternative products if they are more suitable for you.

Speaking with a development finance broker is also the best way to kickstart your application if you’re ready to proceed, as they can introduce you to the lender best positioned to offer you a favourable deal based on your needs and circumstances.

Get matched with a development finance expert today

Consulting with an expert before making a development finance application is always a good idea, as this is the best way to minimise the risk and boost your chances of success.

It is, however, important that you find the right expert for the project you’re undertaking, since every broker has their own area of expertise. Luckily for you, we’re here to help by offering a free broker-matching service that will take your needs and circumstances into account to pair you up with the development finance advisor who’s best placed to get you a good deal.

Call 0808 189 2301 or make an enquiry and we’ll arrange a free, no-obligation chat between you and your ideal development finance broker today.

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We know everyone's circumstances are different, that's why we work with mortgage brokers who are experts in Development Finance

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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