Development Finance

We are a “whole of market” broker with access to the best interest rates available, providing you with affordable finance for all types of property purchases and development. 

Development finance is a specialised form of funding that helps property developers or businesses finance construction or renovation projects. It’s typically used for large-scale developments such as residential housing projects, commercial buildings, or even mixed-use developments. Lenders provide the capital in stages, which correspond to the progress of the project, making it a flexible option for developers to manage their cash flow during construction.

What is the Criteria for Development Finance?

As a general rule of thumb, the following lending criteria will be required:

  • Loans starting from £25,000 with no upper limit
  • Loan terms of up to 24 months
  • Interest rates range from around 7% p.a.
  • Interest is ‘rolled up’ and paid at the end of the loan period; therefore, there are no monthly interest charges
  • Average lender arrangement fees of 1-2% of the entire loan amount
  • In some instances, exit fees will be charged, usually when the LTV is high
  • Land purchase LTV of 75% and build cost of 100%
  • Drawdowns will be made in line with cash flow requirements, subject to careful monitoring by the lender using a QS/monitoring surveyor
  • Valuations performed by the lender both before and after development to assess the value of the completed project (GDV) and the initial build costs

What are the Key Features in Development Finance?

The key features of development finance include staged drawdowns, meaning funds are released as the project progresses; a loan-to-cost (LTC) ratio, often up to 70-80%, which determines how much of the project’s costs can be funded by the lender; and a loan term that usually aligns with the length of the development. Interest is often rolled up; meaning payments are made at the end of the term rather than monthly.

The table below is just for example purposes. For more precise information use our property development finance calculator

Note Value

Your Outlay

£98,000

Development Finance Facility

£210,000

Overall Project Build Cost

£308,000

Interest Payable

£34,750

Lending Fees

£1,365

Solicitor Charges

£950

Projected Sale Price

£495,000

Expected Profitability

£149,935

The total amount needed is carefully assessed, with funds being released at key stages of the development. The entire cost of the build can be borrowed with no specific upper limits, giving the developer flexibility to bring the project to completion.

What are the Advantages of Development Finance?

Development finance offers several benefits. It provides flexible, stage-by-stage funding, enabling developers to manage cash flow effectively. It typically requires less upfront capital, allowing developers to take on larger projects. Additionally, it can be tailored to suit the specific needs and timeline of the project, and the interest is often rolled up, freeing up cash during the build phase.

Costs and fees associated with development finance

There are various fees you will need to take into account when you calculate the total cost of your development:

  • Facility Fee: Also commonly referred to as the arrangement fee. This fee is calculated as a percentage of the total loan amount.
  • Interest Rate: Interest on development finance can be paid on a monthly or yearly basis. Yearly rates are typically around 7%, and monthly rates are around 1%.
  • Exit Fee: Also referred to as a completion fee, which is calculated as a percentage of the total loan cost, lenders may calculate the exit fee as a percentage of the value of the completed project as opposed to the loan value.
  • Broker Fee: The industry standard is around 2% of the net loan.
  • Valuation Fees: As development finance is a secured type of loan, it will require that a full valuation of the assets offered for security be valued by a neutral third party. The completed project will typically be valued at the same time.
  • Application Fee: Some lenders will impose a fee simply for making an application or may charge a commitment fee.
  • Legal Fees: Any required legal advice or the need for a solicitor for any reason will result in legal fees that will have to be paid by the borrower.
  • Administration Fees: These fees can refer to just about any administrative work and are therefore somewhat vague in terms of what they include. UK Property Finance does not charge any administration fees.
  • Monitoring Fees: Due to the monitoring required by the lender on each development to ensure that the project is reaching its predetermined goals, you will need to pay monitoring fees. This is to ensure that the funds being released are allocated as agreed and that the lender’s investment is safe.
  • Drawdown Fees: This is a fee that is sometimes imposed every time funds are released to the developer. The fee can be a fixed amount or a percentage of the project.
  • Telegraph Transfer Fee: Also referred to as TT fees, this is the fee charged by the banks handling the transfer of funds, which in the case of a development loan will involve large sums of money. TT fees tend to be low and are typically fixed.

The Process of Applying for Property Development Finance

The process of obtaining property development finance starts with submitting a detailed proposal outlining the development plans, financial projections, and timeline. The lender will assess the viability of the project, the developer’s track record, and the potential return on investment. Once approved, funds are released in stages as the development progresses, with each stage requiring certification from a monitoring surveyor. Development loans are repaid upon completion, usually through the sale of the property or refinance.

To begin the application process, call our development finance lending team on contact number 0116 464 5544.

What are the Different Types of Development Finance?

There are several types of development finance, including:

Debt-based development finance

Debt-based development finance allows developers to borrow money from lenders to fund property development projects. Unlike equity-based finance, where investors take a share of the profits, debt-based finance requires developers to repay the loan with interest within a set time-frame.

This type of finance offers several key benefits:

  • Staged Drawdowns: Lenders release funds in stages as the project advances, helping developers manage their cash flow effectively.
  • Loan-to-Cost Ratio (LTC): Developers can secure up to 70-80% of the total project costs, reducing the amount of upfront capital they need.
  • Interest Payments: Developers or development institutions either pay interest monthly or roll it up to be repaid at the end of the loan term, along with the principal.
  • Fixed Repayment Terms: Developers repay the loan by selling the completed property or refinancing it once the project is finished.

With debt-based development finance, developers can leverage a large portion of the project costs while keeping full ownership, as long as they meet the repayment terms. Be sure to use a development finance calculator to assess your feasibility.

Equity based development finance

Equity-based development finance lets developers raise funds by offering investors a share of ownership or profits in the project. Instead of taking on debt, developers attract investors who provide capital in exchange for a stake in the project’s success.

Here’s how equity-based development finance works:

  • Shared Risk and Reward: Investors share both the risk and the profits, earning a portion of the returns when the project is completed.
  • No Repayments During the Project: Developers don’t need to make regular repayments during the development phase, which helps with cash flow.
  • Profit Sharing: Instead of repaying a loan with interest, developers distribute a percentage of the profits to investors once the property is sold or leased.
  • Flexible Financing: Investors often offer more flexibility than traditional lenders, especially regarding project timelines and challenges since their return depends on the project’s success.

Equity-based development finance is ideal for developers who want to reduce upfront financial strain, share the project’s risk, and maintain greater flexibility throughout the development process.

Follow this link to view more types of development finance available in the UK.

Example of Development Finance

A short-term lending facility used for the purchase of land and/or property intended for development. The funds are released in stages or drawdown payments upon the completion of pre-agreed work. At each drawdown, a surveyor (usually the surveyor who made the initial valuation) will visit the site and authorise the release of further funds. This is to ensure that all pre-arranged work stages are being met and that the funds are being used appropriately.

Typical project cost breakdown

Site cost/valuation: £800,000
Build cost (released in stages): £600,000
End valuation: £2.4million
Developer profit: £1 million

 

Since the property was mainly let on standard assured short-hold tenancy agreements after 6 months, we arranged long-term commercial finance to repay the development loan via a high-street funder.

Our swift and proactive approach enabled our client to maximise profitability by ensuring the funding was available in time to complete the build, thus enabling students returning to university to habit the pods.

How Does Property Development Finance Differ from Bridging Loans?

While both property development finance and bridging loans are short-term funding solutions, they serve different purposes. Development finance is tailored for construction projects and is released in stages as the project progresses. In contrast, bridging loans are typically used to bridge a short-term gap in financing, such as purchasing a property quickly before securing long-term finance. Bridging loans are usually a one-off lump sum, whereas development finance is more structured and tied to the progress of a project.

Why Use UK Property Finance

Using UK Property Finance for development finance offers a tailored approach to funding your property projects. With deep expertise in the UK market, they provide flexible and competitive financing solutions that cater to the unique needs of property developers. Their understanding of local regulations and market conditions ensures you receive the most relevant advice and funding options. By using our services, developers benefit from streamlined processes, personalised support, and access to a network of financial products designed to maximise project success and profitability.

Below is an infographic displaying 8 reasons why property developers should use us:

Development Finance infographic

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