What is development finance and how does it work?

Development finance is short-term lending used to fund a property development, from buying the site to finishing the build. Unlike a mortgage, the money is released in stages as the work progresses, and the loan is repaid in one amount at the end, usually from selling the finished units or refinancing onto longer-term lending once they are let.

It is used for ground-up new builds, conversions, and major refurbishments that change a building's use or structure. Borrowers are usually developers or companies set up for a project. The main types and uses are covered in the development finance section.

Development finance works in stages. The lender agrees a facility based on the site, the costs and the value of the finished scheme. It may fund part of the site purchase on day one, then release build funds in stages after a monitoring surveyor inspects the work. Interest is usually rolled up and repaid with the loan at the end.

Before the first drawdown, the lender checks the planning permission, the cost plan, the build contract, the professional team and the exit. The monitoring surveyor reports throughout the build, and funds are only released for work that has been completed to the agreed standard. Any cost increases are flagged early so the developer can fund them.

Lenders size development loans using two measures. Loan to cost compares the loan with the total project costs, including the site, build, fees and contingency. Loan to gross development value compares the loan with the expected value of the finished scheme. The lower of the two limits usually sets the maximum facility the lender will offer.

The developer funds the rest, from their own money or from mezzanine or equity partners. A development finance example helps show how these measures interact, and the development finance calculator sets out the main inputs.

The main development finance options are senior development loans for ground-up builds, conversion and heavy refurbishment finance, mezzanine and stretch senior finance to fund more of the costs, joint venture and equity funding, and development exit finance to repay the build loan at the end. Specialist sectors, such as care home development, have their own lender criteria.

Short-term loans to buy a site before planning, or to fund lighter works, are usually arranged as bridging loans rather than development finance. The right type depends on the stage of the project and the work involved.

Most development finance is unregulated, because it is business lending to developers building homes or commercial property to sell or let. Regulated development finance only arises in specific cases, such as when a borrower or close family member will live in the finished property, where FCA mortgage rules may apply. Self-build mortgages for a borrower's own home are regulated.

Because most development lending is unregulated, borrowers rely mainly on the facility agreement and their own legal advice. Lenders and brokers may still be authorised by the FCA for other activities.

To get development finance, a developer prepares a funding pack with the site details, planning permission, drawings, a cost plan with contingency, a programme of works, sales evidence for the finished units, details of the professional team and contractor, and a clear exit. The lender reviews the pack, values the site and scheme, and issues terms.

Experience matters, so first-time developers often start with smaller schemes or a joint venture. Development finance brokers can compare lenders whose criteria fit a particular scheme.

Development finance costs include interest, usually rolled up, arrangement and exit fees, monitoring surveyor fees, valuation and legal fees. Because interest is charged only on money drawn, staged releases keep costs lower than a single advance. The main risks are build cost overruns, delays and falling sale values, all of which can erode the profit margin.

Lenders reduce these risks by requiring a contingency, monitoring the build and limiting loan to cost. Developers reduce them with fixed-price contracts, realistic programmes and a margin that can absorb delays, and by keeping the lender informed. Pricing structures are explained on the development finance rates page.