Development Finance Costs: How It Works for UK Property Projects
Development finance pays for a UK property project in stages and is repaid from sales or a refinance. It is priced differently from a mortgage, so the headline rate tells you little. This guide explains how the loan is released, how lenders decide how much to lend, and what a project can really cost, with a worked example. It builds on our page on development finance for expats.
This guide is general information, not financial advice. Figures vary by lender, project and borrower, and the example below uses invented numbers.
The short answer
- Lenders limit the loan by cost and by the finished value, and use the lower figure.
- You usually put in 20% to 30% of the cost as equity.
- Money is released in stages, and interest is charged only on what has been drawn.
- Interest, arrangement, exit, legal and monitoring fees together make up the real cost.
How the loan works
The lender advances money against milestones. A monitoring surveyor, whom you pay for, inspects the work before each payment is released. Interest is usually rolled up and repaid at the end, on the amount drawn. The loan has a term, commonly 9 to 24 months and up to 36 for some heavy refurbishments, and a backstop date by which it must be repaid, typically three to six months after the works are due to finish. You repay from selling the finished units or by refinancing onto a mortgage or an exit loan.
How much you can borrow
Two limits apply. Loan-to-cost is the loan as a percentage of the total project cost, including land and build. Loan-to-GDV is the loan as a percentage of the gross development value, which is the expected value of the finished project. Lenders use the lower of the two. For senior debt, loan-to-GDV is often around 60% to 70%. First-time developers can get funding, but usually with a lower loan, more equity and a stronger professional team.
A worked example
This example uses invented figures and is not a quote. You buy land for £400,000, budget £500,000 for the build and £100,000 for professional fees and contingency. The total cost is £1,000,000, and the finished project is expected to be worth £1,500,000.
| Item | Figure |
|---|---|
| Total project cost | £1,000,000 |
| Gross development value | £1,500,000 |
| Loan-to-cost limit (70%) | £700,000 |
| Loan-to-GDV limit (65%) | £975,000 |
| Loan available (the lower figure) | £700,000 |
| Equity you provide | £300,000 (30%) |
Now the finance costs. Because money is released in stages, assume the average drawn balance is £450,000 over a 12-month project, with interest at 0.85% a month. Interest is £3,825 a month, or £45,900 over the year. Add an arrangement fee of 2% of the £700,000 loan, £14,000, monitoring surveyor fees of £6,000, legal costs of £7,000 and an exit fee of 1%, £7,000. The fees come to £34,000, so the finance costs total £79,900. That is about 5.3% of the finished value.
What pushes the cost up
- Delays. Each extra month adds interest on the full drawn balance. In the example, a three-month delay at £700,000 drawn would add about £17,850 in interest.
- Cost overruns. The lender will not usually increase the loan, so overruns come from your own funds. A contingency is essential.
- Slow sales. You may pay extension fees and more interest. A development exit loan or a refinance can help if arranged in time.
- Planning risk. Most lenders want full planning permission before a formal offer, and a refusal can undo the whole plan.
How drawdowns work in practice
The lender usually releases the land purchase first, at its loan-to-cost percentage, then funds the build in instalments once the monitoring surveyor confirms each stage. Interest runs on each draw from the day it is released. Keep a schedule of expected draws, so you can estimate interest month by month and see when your own equity must go in, since lenders commonly require it before they release their own funds.
Exit routes compared
- Sell the units. The most common route. Lenders usually want to see evidence of likely sale values.
- Refinance onto a mortgage. You keep the property, for example to let, and repay the loan from longer-term borrowing.
- Development exit loan. A cheaper, shorter loan that replaces the development loan, so you can sell the units without time pressure.
Whichever you plan, agree a second route in case the first slips. A development that needs a sale at a particular price to repay the loan has little room for a falling market.
Managing a project from abroad
Lenders check your country, your structure, your experience and how the build will be managed. A UK project manager, a clear contract, regular reporting and a contingency all help. Most developers borrow through a company or special purpose vehicle, and lenders often ask the directors for personal guarantees.
Common mistakes
- Underestimating build costs and leaving no contingency.
- Forgetting that your own equity usually goes in before the lender releases funds.
- Assuming planning permission will be granted, without a fallback if it is not.
- Ignoring the interest that builds up when the project runs late.
- Choosing a lender on rate alone, without checking fees and drawdown rules.
- Planning only one exit route.
Most of these come down to the same thing: a development finance deal has little slack, so build slack into the budget and the timetable before you borrow.
Questions to ask a lender or broker
- What loan-to-cost and loan-to-GDV limits do you apply to my project?
- How much equity do you need, and when must I put it in?
- How and when is money released, and who pays the monitoring surveyor?
- Is interest rolled up, and is it charged only on the amount drawn?
- What are the arrangement, exit, legal and monitoring fees in total?
- What happens at the backstop date, and what does an extension cost?
Related reading
Development finance is a short-term loan, so our worked example of bridging loan costs shows how time drives cost. See also our guide to choosing between a commercial mortgage or a bridging loan and our guide to stamp duty for non-UK residents. For light works only, a bridging loan for refurbishment may be enough. For the wider picture, see our expat financing hub, our overview of property finance for expats and our page on property development finance.
Frequently asked questions
What does development finance cost?
Interest from roughly 0.8% a month, plus arrangement, exit, valuation, legal and monitoring surveyor fees. The total depends on the loan, the term and how much is drawn.
How much can I borrow?
Lenders apply a loan-to-cost and a loan-to-GDV limit and use the lower figure. Senior debt is often around 60% to 70% of GDV.
How much equity do I need?
Often 20% to 30% of the total cost, depending on your experience and the project.
Do I pay interest monthly?
Usually not. Interest is rolled up and repaid at the end, on the amount drawn.
What if costs overrun?
You must find the extra money from your own funds, because the lender will not usually increase the loan.
Can an expat get development finance?
Yes. Lenders focus on the project, but they also check your country, structure, experience and how the build will be managed.
This article is for information only and is not financial advice or a recommendation. Development finance is usually unregulated, costs vary and the security may be repossessed if the loan is not repaid. Take advice before you borrow.
