Development finance for property projects

Development finance is a short term loan for building or substantially changing property. It might be a small scheme of two or three houses, the conversion of an office into flats, or a heavy refurbishment that a standard mortgage lender would not touch. Rather than lending one lump sum, the lender typically funds part of the land or property purchase upfront and then releases money for the build in stages as the work is completed.

It is a different world from residential mortgages, and the lenders in it vary a great deal. Some prefer experienced developers with a track record, others will consider a first project. Some like ground up new builds, others focus on conversions. Our job is to understand your scheme properly and then put it in front of lenders whose appetite fits.

Commercial mortgages and development finance are generally not regulated by the Financial Conduct Authority.

How development finance works

Most development facilities are built around two figures: the total cost of the project and the gross development value, which is what the finished property is expected to be worth. Lenders usually lend a share of the purchase price and the build costs, with an overall cap measured against the finished value. The exact limits vary by lender, by the type of scheme and by your experience.

Funds for the build are normally released in arrears. You complete a stage of the work, the lender's monitoring surveyor visits to confirm it, and the next tranche of money is released. Interest is commonly rolled up and paid at the end, rather than monthly, which helps your cash flow during the build.

All lending is subject to underwriting and valuation, and lenders will want a professional valuation that sets out both the current value and the expected value on completion.

What lenders look at

Development lenders are assessing the project as much as the person. In general terms, they will want to understand:

• Your experience. Previous projects, your background in property or construction, and the professional team you have around you.
• The numbers. A realistic build cost appraisal, a sensible contingency, and an expected profit margin that leaves room for things to change.
• Planning. Most lenders want full planning permission in place before building work is funded.
• The exit. How the loan will be repaid, whether by selling the units or refinancing onto a longer term mortgage.
• You. Your own assets, liabilities and credit history, and often a personal guarantee where you borrow through a company.

Many developers borrow through a limited company or a special purpose vehicle. How you structure that is a question for your accountant, and we are happy to talk it through with them so the finance and the structure line up.

What you'll usually need

• A full schedule of works and a build cost appraisal, ideally prepared or reviewed by a quantity surveyor
• Planning permission and approved drawings
• Details of your contractor, architect and any other professionals involved
• A schedule of any previous development experience
• Evidence of where your own contribution is coming from
• Your company documents, if borrowing through a limited company
• A personal assets and liabilities statement

Planning your exit from the start

The exit matters as much as the build. If you plan to sell, lenders will look at local demand and comparable sales for the finished units. If you plan to keep the property and let it out, you will need to qualify for a buy to let or commercial mortgage at the end of the project, and it pays to know that before you start.

We can look at both sides at the outset, so the development facility and the longer term mortgage fit together. If you intend to keep the finished units, our page on buy to let mortgages explains how lenders usually assess rental income, and for mixed use or commercial schemes see commercial mortgages.

Smaller schemes and conversions

Not every project needs a full development facility. A light refurbishment, or a property bought at auction that needs work before it can be mortgaged, may be better suited to a bridging loan. Our page on auction finance covers how that works. Part of our job is telling you which route makes more sense for your plans, and being honest when a project may be difficult to fund as it stands.

How we work with you

It starts with a proper conversation, usually 30 to 45 minutes by phone or video, about the site, the scheme, your experience and how you plan to exit. If it looks fundable, we will tell you what to gather and you upload it once through our secure portal.

We then research the lenders whose criteria fit, explain the options in plain English, and obtain terms. Once you choose a route, we package the full application for the underwriter and keep things moving through valuation, legal work and the first drawdown. The initial consultation is free. Get in touch and we will aim to reply within the hour during office hours.