Property development finance: how it works and what it costs

What is development finance?

Development finance is a short-term loan used to build new property or substantially change an existing building. It funds work that a normal mortgage lender will not, because there is nothing finished to lend against yet. Typical projects include:

• Ground-up new build: houses, flats, industrial and trade units, offices, care homes or student accommodation on a cleared site.
• Conversions: an office or shop turned into flats, a barn into homes, or a large house into a block.
• Heavy refurbishment: structural work, extensions or a change of use that needs planning permission and building regulations approval.

Three features set it apart from other business borrowing. The money is released in stages, in arrears, as each part of the build is completed and certified. Interest is usually rolled up, added to the balance and paid at the end, because the site earns nothing while it is being built. And the loan is repaid in one go from the exit: the sale of the finished property, or a longer-term loan once it is let.

Lighter work, such as cosmetic refurbishment that needs no planning permission, is usually funded with a commercial bridging loan instead. Our guide to commercial loans shows where development finance sits among the other types of business property finance.

Our upcoming introduction service is limited to UK limited companies and excludes residential-property security, so it would cover commercial schemes such as industrial units, offices and retail, but not loans secured on homes or flats. This guide explains both, because most of the principles are the same. It assumes the borrower is a limited company, usually a special purpose vehicle (SPV) set up for the project.

How development finance works, step by step

A development loan follows the project from the site purchase to the sale of the last unit. Each stage has its own checks.

1. Appraisal. You set out the site cost, build cost, fees, contingency, finance cost, the finished value and the profit. Lenders judge the scheme first on this document.
2. Terms. A lender or broker issues indicative terms: the facility size, rate, fees, the share of the site it will fund and the conditions.
3. Valuation. The lender instructs a RICS valuer to report on the site value today and the GDV, often with a view on the build cost and how quickly units will sell.
4. Monitoring surveyor’s initial report. A quantity surveyor acting for the lender reviews the build contract, the cost plan, the programme, planning and the professional team.
5. Credit approval and legal work. Solicitors for both sides deal with title, security, the build contract, warranties, insurance and any guarantees.
6. Day-one advance. At completion of the site purchase, the lender releases its agreed share of the site cost. Your equity goes in first or alongside.
7. Monthly drawdowns. The monitoring surveyor visits, values the work done and certifies it. The lender pays the contractor or the developer for the certified work, usually within a few working days.
8. Practical completion. The building is finished, signed off by building control and, for new homes, covered by a structural warranty.
9. Exit. Sale proceeds go to the lender until the loan, interest and fees are repaid. Or the property is let and refinanced onto a term loan.

Interest is only charged on money that has been drawn, which keeps the cost down early in the build. Some lenders also charge a small non-utilisation fee on the undrawn part of the facility.

How much can you borrow? Loan to cost and GDV

Development lenders size a loan against two limits and use whichever is lower.

• Loan to cost (LTC): the loan as a share of the total project cost, usually the site, the build, professional fees and contingency. Senior lenders commonly go to 75% to 90% of costs.
• Loan to gross development value (LTGDV): the loan as a share of the finished value. Senior lenders commonly go to 60% to 70% of GDV. For a gross loan cap, the fees and the rolled-up interest count towards this limit, not just the money you receive.

Lenders usually fund the build in full, in arrears, and only part of the site. A common pattern is 50% to 70% of the site price on day one, with the developer’s money going in first. The less profit the scheme makes, the more the LTGDV cap bites and the smaller the share of the site the lender can fund.

These ranges are drawn from published lender and broker information for UK schemes in October 2026. They are not offers, and many lenders go lower for first-time developers or unusual property. Our guide to how much a business can borrow explains how lenders size other kinds of loan.

Development finance rates and fees in 2026

Development finance is priced mostly as a monthly rate, with a set of fees on top. The Bank of England held Bank Rate at 3.75% on 17 September 2026, and its next decision is due on 5 November 2026. Banks often price development loans as a margin over Bank Rate or SONIA. Specialist lenders usually quote a fixed monthly rate for the life of the loan.

These ranges are indicative, drawn from published lender and broker information for October 2026. They are not quotes. A monthly rate compounds when interest is rolled up: 0.95% a month is 11.4% a year before compounding, and about 12% after it. Compare offers on the total cost in pounds over your expected programme, including fees, not on the headline rate. Our guides to business loan interest rates and comparing business loans explain how to put different quotes on the same basis.

Types of development finance compared

Most schemes are funded by a senior loan plus the developer’s own money. When the developer has less cash, another layer fills the gap, at a price.

In England, the National Housing Bank, set up by Homes England in March 2026, offers loans, equity and guarantees for housing delivery, including for smaller housebuilders. It works alongside private lenders rather than replacing them, so most SME schemes are still funded by banks and specialist lenders.

When a scheme has a buyer lined up, or will be held and let, the exit matters as much as the build loan. Owner-occupiers who buy finished commercial units often use a commercial mortgage. A developer that keeps and lets the units usually refinances onto a commercial investment loan. Our guide to commercial buy to let mortgages explains the rent cover that refinance needs.

What development lenders look for

A development lender is betting that the building gets finished, on budget, and sells or lets for what the valuer expects. Everything it asks for tests one of those three things.

The scheme

• Planning. Full planning permission, ideally with the pre-commencement conditions discharged. A permission usually has to be started within 3 years of being granted, so lenders check the date. Some conversions use permitted development rights with prior approval instead.
• Profit. Many lenders want a profit of at least 15% to 20% of GDV, or 20% to 25% of cost. A thinner margin leaves no room for overruns.
• Evidence of value. Recent sales or lettings of similar property nearby, and agents’ views on price and how fast it will sell.
• A priced build. A detailed cost plan, a programme and, ideally, a fixed-price contract.

The team

• Your track record. Completed schemes of a similar type and size. Lenders are more comfortable when the new scheme is a step up, not a leap.
• The contractor. Its accounts, insurance and experience. Many lenders prefer a recognised fixed-price contract, such as a JCT design and build contract, with a contractor that will survive the build.
• The professional team. Architect, structural engineer, quantity surveyor, project manager and building control, appointed with professional indemnity insurance. Lenders usually ask for collateral warranties so they can rely on the team’s work.

The borrower and the money

• A clean SPV. Many lenders prefer a limited company set up only for the project, with no other trading history or debts. Common SIC codes are 41100, development of building projects, and 68100, buying and selling of own real estate.
• Your equity. Proof of where your share of the costs comes from, and that it is in the scheme before the lender’s money.
• Guarantees. Personal guarantees from the directors are normal on SME schemes, sometimes capped at part of the loan, and some lenders also ask for cost overrun and completion guarantees. Our guide to personal guarantees explains what you would be signing.
• Credit history. The company’s and directors’ records. Our guide to bad credit business loans explains how lenders weigh CCJs and defaults.

Lending to a limited company to build property for sale or letting is not a regulated mortgage contract, so FCA mortgage rules do not apply. The FCA’s perimeter guidance sets out when property lending is regulated. That leaves the detail of the facility letter to you and your solicitor, so read it in full.

Planning, tax and the costs appraisals miss

Build cost gets the most attention, but the costs around it are what most often turn a profitable appraisal into a thin one. Lenders will expect each of these to be priced.

Community Infrastructure Levy (CIL)

In areas that charge it, CIL applies to most new development that creates 100 square metres or more of new floorspace, or a new home, at a rate per square metre set locally. Rates vary widely by area and use, and many councils zero-rate some commercial uses. Under the government’s CIL guidance, someone must assume liability and the council must receive a commencement notice before work starts. Miss that and the full amount can become payable at once, without the council’s instalment policy, and surcharges can apply.

Section 106 and highway works

Planning obligations can require affordable housing, payments towards schools, open space or transport, or highway works. Under the planning obligations guidance, affordable housing should only be sought on major residential development, generally 10 or more homes or a site of 0.5 hectares or more. Smaller schemes can still face other contributions.

Biodiversity net gain (BNG)

In England, most planning permissions must deliver a 10% gain in biodiversity, on site, off site or by buying credits. From 6 August 2026, developments on sites of 0.2 hectares or less are exempt, unless they affect priority habitat, and the separate self-build exemption no longer applies to new applications. Larger sites need an ecologist’s assessment early, because off-site units can cost tens of thousands of pounds.

Stamp Duty Land Tax on the site

Land with no dwelling on it is charged at non-residential rates: nothing up to £150,000, 2% to £250,000 and 5% above. A site bought for £380,000 costs £8,500. Buying a house to demolish or convert is a residential purchase. Companies pay a 5% surcharge on residential property and, above £500,000, can face a flat 17% rate, although relief from the 17% rate may be available to property developers that meet the conditions. Scotland and Wales have their own taxes.

VAT

VAT changes both the cost and the cash flow, and it differs by type of scheme. Under VAT Notice 708, building new homes is zero-rated, and converting a non-residential building into homes is charged at 5%. New commercial buildings are standard-rated at 20%, and a freehold sale of a commercial building within 3 years of completion is also standard-rated. A developer that registers for VAT can usually recover the VAT it pays, but it has to fund that VAT until the refund arrives. On £1.5 million of commercial build costs and fees, that is about £300,000 passing through the company. Some lenders offer a separate VAT facility. If the seller of a site has opted to tax, VAT is added to the price and SDLT is charged on the VAT-inclusive figure. Take advice from an accountant before you exchange.

Utilities, warranties and building safety

• Utilities. New connections, diversions and, for industrial schemes, an electricity supply upgrade or substation can cost far more than expected and take months. Get quotes before you buy.
• Structural warranty. Buyers’ mortgage lenders generally expect new homes to carry a 10-year structural warranty, and developers registered under the New Homes Quality Code have duties to buyers. Commercial schemes rely more on collateral warranties.
• Higher-risk buildings. Buildings of at least 18 metres or 7 storeys with at least 2 homes need Building Safety Regulator approval before work starts. The regulator aims to decide new-build applications within 12 weeks, but its May to July 2026 data shows a median of 22 weeks. A lender will price that wait into the programme and the interest.

Worked example: six light industrial units

This example follows a commercial scheme from site to sale. The figures are assumptions for the illustration, not a lender quote or a valuation.

A profit of 16.3% of GDV is near the bottom of what many lenders accept. That is why the next step, the stress test, matters.

Stress-testing the scheme: what if it goes wrong?

A lender will run its own downside cases, and so should you. Here is the same scheme with the things that most often go wrong. Each case uses the same facility as above.

The lesson is that development finance is cheap compared with what can go wrong. A 10% fall in sale prices costs the developer more than the entire finance bill. The figures are illustrations.

How to protect the scheme

• Keep cash in reserve on top of the contingency, ideally enough to cover a 10% overrun and three extra months of interest.
• Fix the build price where you can, and check what the contract lets the contractor claim for.
• Pre-sell or pre-let some units. It reduces both the price risk and the time risk, and lenders reward it.
• Negotiate the term with a few months’ slack, and agree the cost of an extension before you need it.
• Line up a fallback exit, such as a bridging or development exit loan, or letting the units and refinancing.

Mezzanine finance: less cash in, more risk

Mezzanine finance lets a developer put in less of its own money by adding a second, more expensive loan behind the senior lender. It improves the return on cash when things go well and makes losses bigger when they do not.

Mezzanine works best on schemes with a wide profit margin, an experienced team and a fixed-price build. On a thin margin, an equity partner who shares the risk may be a better choice, even though it costs more of the upside. The senior lender must agree to any mezzanine loan, usually in an intercreditor agreement that sets out who is repaid first and who can step in.

Residential and commercial schemes: what changes

The structure of the loan is the same, but tax, building rules, leverage and the exit differ between homes and commercial property.

Mixed-use schemes, such as shops with flats above, fall between the two. Lenders and HMRC each treat them according to their own rules, so check how a lender will value and secure the residential part.

Development finance for first-time developers

First-time developers can get development finance, but the choice is narrower and the terms are tighter. Expect a lower loan to cost, a higher rate, more equity and closer monitoring. These steps make the biggest difference:

• Start small and simple. A conversion or a handful of units with full planning, in a location with plenty of comparable sales, is much easier to fund than a first block of flats.
• Bring in experience. An experienced project manager, an established contractor on a fixed-price contract or a joint venture with a developer who has done it before can stand in for your own track record.
• Show relevant background. Lenders give weight to experience in construction, surveying, refurbishment or property investment, even without a completed development.
• Put in more of your own money. A larger equity share reduces the lender’s risk and leaves room in the GDV cap.
• Get the appraisal checked. An independent quantity surveyor’s cost plan is cheap compared with an underpriced build.

A broker who specialises in development finance knows which lenders back first-time developers. Ask how they are paid, how many lenders they work with and whether they charge you a fee.

Risks to understand before you sign

• Contractor failure. If the contractor stops work or becomes insolvent, the programme stops but the interest does not. Check the contractor’s finances and keep a retention, and ask what the lender does if a replacement is needed.
• Running out of facility. Overruns and delays are the developer’s problem. When the rolled-up interest reaches the facility limit, the lender may ask you to pay interest monthly or put in more cash.
• Default terms. Missing the repayment date, or breaching a condition, can trigger default interest and fees. Read how the lender can step in, appoint a receiver or sell the site.
• Valuation falls. A lower valuation at a later stage can cut what the lender will release, even if the build is on track.
• Personal liability. Guarantees can make directors personally liable for some or all of the debt, and for overruns.
• Planning and building control. Unmet pre-commencement conditions, a missed CIL notice or an unexpected building safety requirement can stop drawdowns.

A short-term loan with a hard deadline suits a developer with a clear exit and cash in reserve. It is a poor fit for a scheme that only works if everything goes to plan.

Applying for development finance: ten steps

1. Secure the site properly. An option, a conditional contract or an agreed purchase, with time for planning and funding.
2. Confirm planning. Full permission, the conditions and their timing, and whether CIL, section 106 or BNG apply.
3. Price the build. A cost plan from a quantity surveyor and, ideally, a fixed-price tender from a contractor with sound accounts.
4. Price everything else. Utilities, fees, warranties, VAT cash flow, sales costs and a realistic contingency.
5. Prove the value. Comparable sales or lettings and agents’ written views on price and speed of sale.
6. Build the appraisal and stress-test it. Cost overruns, delays and lower prices, alone and together.
7. Set up the SPV and show your equity. Where your cash is and when it goes in.
8. Compare terms in pounds. Facility size, the share of the site funded, rate, every fee, term, extension costs and guarantees.
9. Plan the exit and the fallback. The sale or refinance, who will lend on it and what happens if it is late.
10. Read the facility letter with your solicitor. Conditions before each drawdown, events of default, step-in rights and every guarantee.

For a let commercial building, the commercial mortgage calculator shows what a refinance would cost each month. Our guides on getting a commercial mortgage and the borrowing checklist cover the preparation that applies to any property loan.

Common questions