Property development finance funds what a standard mortgage simply cannot. Whether you are building from the ground up, converting an existing property, or scaling your portfolio, this guide explains how development finance works and how to secure the best terms for your project.
Key Takeaways
Development finance is a specialist short-term funding product for residential and commercial development projects. Here is what matters most before you read on:
- Development finance is assessed on the projected value of the completed project, known as the Gross Development Value (GDV), not the current value of the site.
- Most lenders cap borrowing at 65–70% of GDV, with an absolute maximum of 75%. Loan to cost should not exceed 85%, though 90% is achievable for experienced developers.
- Interest is typically rolled into the loan and repaid on completion. On multi-unit schemes, the debt reduces as each unit sells.
- You do not need prior development experience to apply, but a strong professional team significantly improves your chances and your terms.
- Planning permission is not always required to secure finance, though it will improve your terms considerably.
- Always include a contingency budget of 5–10% of total project cost. Lenders expect it and experienced developers rely on it.
- The best time to speak to your broker is the moment you identify a development opportunity, not once you have already committed.
What is property development finance?
Property development finance is a short-term funding option, typically available for between 12 and 36 months, designed to cover the purchase and build costs of a residential or commercial development project. Unlike a standard mortgage, where lending is based on the current value of a property, development finance is assessed against the Gross Development Value (GDV): the estimated open market value of the completed project once work is complete. It is available for new builds, conversions, and refurbishments, covering single units through to multi-phase schemes. Finance is drawn down in stages as the build progresses, with interest typically rolled up and repaid on completion. It is best accessed through a whole-of-market broker with specialist knowledge of the development finance market.
How do property developers raise finance?
Developers can access funding through a range of financial institutions, from high street banks and challenger banks through to specialist lenders. The key advantage of working with a whole-of-market broker like NM Finance is access to the full range of providers, not just a limited panel. That means more options, more competitive terms, and advice tailored to your specific project rather than a lender’s product range.
See also: Development Finance
Can I get a property development loan?
Development finance is available to a wide range of applicants, from first-time developers through to experienced housebuilders. The terms you are offered will depend on a number of factors. The most significant are your experience, the strength of your project, and the level of risk the lender is being asked to take on. The more you can demonstrate, in terms of track record, a realistic appraisal, and a strong team, the better the terms you are likely to receive.
How does property development finance differ from a mortgage?
Development finance works differently to traditional mortgages. Usually, lenders assess the value of the property and then offer a loan based on that and the borrower’s eligibility. For development loans, lenders assess the predicted value of the property once the development project is complete. That figure is the Gross Development Value, or GDV.
To apply for development finance, developers must submit an application that details how much they paid or are paying for the property/site, the cost of the development and professional fees, and building timescales. Based on this information, they are given a list of terms from the lender that need to be agreed to before proceeding to a full application.
What is Gross Development Value (GDV)?
The Gross Development Value (GDV) of a development project is an estimate of the open market capital value that the development is likely to achieve once it is complete.
What are loan to GDV and loan to cost, and why do they matter?
These are the two key calculations lenders use to assess how much they will lend, and they are applied at the same time.
- Loan to GDV is how much you are borrowing as a percentage of the completed project’s estimated value. Most lenders cap this at 65 to 70%, with an absolute maximum of 75%.
- Loan to cost is the cost of financing the project compared to the total build cost. This figure should generally not exceed 85%, though 90% is achievable for experienced developers with a strong track record.
Understanding both figures, and how your project sits against them, is something a specialist broker will work through with you before any application is submitted.
How much does development finance cost?
Please note: development finance rates move with the market and with the Bank of England base rate. The figures below are indicative. Speak to us for current rates before making any financial decisions.
Development finance interest rates are calculated on an annual basis and track a base rate, typically the Bank of England base rate or SONIA (Sterling Overnight Index Average). The rate you are offered will depend on your experience, your deposit, the strength of the project, and the level of risk involved.
For experienced developers putting in a substantial deposit and looking to borrow 60 to 70% of land costs and 100% of build costs, terms are generally more competitive. Arrangement fees, known in the market as an ‘In’ fee, are charged by the lender at completion and can typically be funded within the facility. An exit fee, known as an ‘Out’ fee, is charged on final settlement. Not all lenders charge both, and your broker should be negotiating on your behalf on every point.
The more of the following that apply to your project, the better the terms you are likely to achieve:
- To be putting in a substantial deposit
- To have an excellent track record/experience of completing similar projects
- The completed project to have a high demand
- The whole project to be very low risk
Do I need to have development experience?
Not necessarily, but it does make a difference. Lenders are more cautious with first-time developers, and the terms will reflect that. That said, there are practical steps you can take to strengthen your application considerably:
- Build a strong professional team around you. An experienced architect, builder, and project manager, each of whom can demonstrate a history of realistic costings and successful delivery, will carry significant weight with lenders.
- Draw on relevant professional experience, such as a background in architecture, project management, or construction.
- Consider a lower loan to value. Sub-50% LTV is more achievable if you already own the site and have planning permission in place.
- Secure a fixed-price contract with your builders, which reduces the lender’s risk.
- Be aware that most lenders will include step-in rights on contracts with first-time developers. This is standard practice rather than a red flag.
How many lenders offer development finance?
The market has grown significantly over recent years, with well over 100 lenders now offering development funding options. That breadth of choice is precisely why working with a whole-of-market broker matters. Not all lenders suit all project types, and the difference between the right lender and the wrong one can be significant, both in terms of cost and in terms of how smoothly your project is funded.
Is development finance the same as a self-build mortgage?
No, Self-build mortgages are designed for applicants who intend to build or renovate a property they will go on to live in themselves.
Development finance is designed for projects that will be sold or retained as investment property; the applicant will never occupy the development. If you are unsure which product applies to your situation, that is the right conversation to have with a broker before you go any further.
How long does a development finance application take?
Application times will depend on how quickly you can return the required documents, how soon a surveyor can complete a valuation, and whether the lender has any further questions or queries that need answering before the loan can proceed. Generally, you’ll find that the funds are available within two to eight weeks of the offer to lend.
Starting the process early, as soon as you have identified an opportunity, gives you the best chance of moving at the pace the deal requires.
When do I repay my property development finance loan?
In most cases, interest is rolled into the loan throughout the build and the total, capital plus interest, is repaid when the development completes. On multi-unit developments, the debt reduces with each completed unit sale, which means your finance costs are actively reducing as you sell through the scheme. This is worth factoring into your development appraisal from the outset. Learn more about Developer Exit Finance here.
Can I apply for development finance on any type of build?
Yes. Development finance covers new builds, conversions, and refurbishments across residential and commercial property. Most lenders operate a minimum loan size, and as a general rule the larger the loan, the more competitive the terms. If you are unsure whether your project qualifies, the answer is almost always to ask rather than assume.
Can I get development finance without planning permission?
Yes, though your options will be more limited and the terms less competitive. Some lenders require planning permission to be in place before they will lend. Others will provide finance without it, and in some cases a conditional offer can be structured, subject to planning being granted at a later date. If you are at an early stage and planning is not yet secured, speak to a broker before ruling out your finance options.
When should I apply for development finance?
The best time to speak to your broker is as soon as you spot a development opportunity.
One of the most common mistakes developers make, particularly earlier in their careers, is waiting until they feel fully ready before approaching a broker. The earlier the conversation happens, the more options are available, and the more time there is to structure the deal properly. Early advice costs nothing and can make a significant difference to how the deal is structured and what it ultimately costs you.
What project costs do I need to include in my application?
A development finance application requires a thorough picture of the project. You will need to provide:
- Details of the site or building: this includes the value, location and the price of the site or property
- Development costs & all professional fees associated with the project
- Development appraisal
- Planning permission details
- Gross Development Value
- The details of all applicants involved-this includes the history of previous developments carried out, how successful they were, their CVs, and project profits from previous developments.
- Who the main contractor and project manager will be
- Asset and liability statement for the company directors or applicants involved
The more thoroughly this is prepared, the smoother the application process will be.
Yes.
A contingency budget allows for any unknown risks to be mitigated once they occur. It is made up of a percentage of the overall budget, somewhere between the sliding scale of 5-10%, depending on the size of the project. Building it in from the start is not a sign of uncertainty about your numbers; it is a sign of experience.
Ready to discuss your development project?
Call us on 0808 281 8824, contact us, or visit our Development Finance page to find out how NM Finance can help you fund your next project.
