Property Development Finance

If you’re looking to finance a building project involving a residential, commercial, or mixed-use property, then development finance could be the solution you need.

This guide covers everything you need to know about getting a development loan. You’ll learn about how these property loans work, the lenders to speak with, alternative financial solutions, and – where to find the best rates.

Keep reading for all the essential details or click on a link below to jump to a specific section…

What is development finance?

This is a type of loan useful for the purpose of funding commercial building projects. It’s a short-term, interest-only solution that can allow you to buy land, pay for the construction of a new building, or renovate an existing property. Development finance is suitable for residential, commercial, and mixed-use properties.

How it works

With development finance, funds are released in stages as your project progresses – just like with a self-build mortgage.

The short-term nature of this type of finance means it can be useful in a variety of different ways. The structure of this financing is similar in many ways to a bridging loan. But, the main difference being the way in which your funds are paid out to you, and the ability to borrow significant sums.

Whereas a bridging loan pays out after the approval of the application, a property development loan requires regular site inspections. Then, the lender releases funds in stages that will be pre-agreed. The formal term for paying the proceeds from the loan to you in this way is ‘tranche drawdowns’.

How you can use development finance for a property

This type of loan can be for both the site purchase and construction costs. However, there can be different terms linking each portion. For example, if you just need the development finance for the actual construction, lenders will set up a loan based on that. But, the borrowing terms might change if you need the funds for buying the land as well.

Development finance is commonly only available to builders and property developers with previous experience. However, some lenders will consider applications if it’s your first undertaking of a development project.

Specialist lenders view this arrangement as a calculated investment opportunity. They are choosing to back your ability to create and finish a building project. So, you’ll have to show them you’re capable if you want to successfully obtain funds.

Deposit size and loan-to-value requirements

The exact figure will depend on your plans. If you’re looking to get finance for both the property site purchase, and the development itself, most lenders will require a deposit in the range of 25-40% of the site’s value.

This will leave you with a loan-to-value (LTV) of between 60-75%. Then, lenders sometimes provide up to 100% LTV for the portion related to development costs, which will be paid out in stages.

To calculate how much they’re willing to let you borrow, lenders will often base it on the project’s Loan to Gross Development Value (LTGDV) plus the cost. And then, offset the current value of your exit strategy against the expected post-development value of the site.

Can you get development finance with no deposit?

Yes, it’s possible. Some lenders will be open to lending you 100% of the site purchasing funds and the development costs without a deposit. However, you’d need to use something as security for the loan such as a high-value asset or another property. Or, certain lenders open to this will request that you share some of your profit once the development project is finished.

Examples of available lenders and rates

Interest rates on development finance are often calculated on a bespoke basis and can depend on the following factors:

• The loan size
• LTGDV and LTC
• How much development experience the applicant has
• Credit history
• The scheme’s location

At the time of writing (May 2023), lenders including NatWest, Shawbrook and Paragon offer development finance loans. The best way to find the ideal lender for you is to apply through a broker who specialises in development finance as this will increase the number of options available to you, while their knowledge and expertise could make a big difference when it comes to negotiating a bespoke rate.

How to get a development finance property loan

The exact structure of the process will be unique to your plans for the property development. But, there are certain steps that will be universal to help ensure you get the right finance solution and the best deal:

Step One: gather your documents and project plans

Before you approach any lenders, it’s important to have all your relevant information to hand. When applying for development finance, you’ll need to have thorough plans in place for the project. You’ll also have to prove access to a solid exit strategy, and ideally – show proof of past projects (if you’ve worked on similar endeavours).

You will also need standard documents like photo ID (passport, driving licence), proof of your registered address (utility bills, bank statements). And, details around your income (whether that’s as an employee or self-employed). It’s worth preparing this in advance because it will lead to a much smoother process.

Step Two: download your credit reports

When looking at your application, lenders will want to see what your financial history looks like, and your credit score will give them a decent snapshot. So, it’s worthwhile downloading all your credit reports ahead of time. This way you can find any potential errors or areas that need improving before you start speaking with lenders.

Doing this will help prevent any unnecessary rejections. Ideally, it’s best to evaluate your reports with a skilled broker, because they’re going to be able to guide you on what suitable lenders will be willing to accept. If you’ve had previous issues, an expert advisor can introduce you to lenders comfortable with bad credit applicants.

Step Three: speak with a development finance specialist

This type of loan arrangement is often set up on a bespoke basis, and not every lender will be able to provide funds for property development. Each lender who operates in this area will also have their own specific requirements around the loans that they can create.

Speaking to a specialist mortgage broker is going to save you time and energy. They’ll be able to assess your plans, and then introduce you to suitable lenders. Sometimes development finance is only offered by private banks and niche lenders who don’t advertise deals, or they may require an introduction from a trusted broker.

If you want to speak with a development finance specialist, just make an enquiry. We’ll set up a free, no obligation chat between yourself and a commercial mortgage expert.

Eligibility criteria and requirements

The exact requirements and eligibility criteria you’ll have to meet will vary. Most lenders who offer development finance do so on a case-by-case basis. This is why there can be plenty of variety in what’s required.

That being said, there are some particularly important areas that tend to be universal amongst those who offer a mortgage to be used for property development:

Exit strategy

Since you’ll only be paying interest on the loan, this is your plan to pay off the debt at the end of your chosen term. For a lender to approve your development finance application, they’ll want to see proof of a solid exit strategy before offering you funds.

The most commonly used plan in circumstances like this would be to remortgage the finished property. Or, use proceeds from the sale once you’ve sold the completed project.

Previous experience

If you can prove you’ve undertaken property developments previously and had success, this is going to increase the likelihood lenders will offer you a loan.

That being said, there are some lenders willing to offer finance to first-time developers. But, you’ll still need to prove why they should back you and provide a loan. For them, it’s an investment, so they want to know their funds are in good hands.

Other specific factors to consider with this loan arrangement

This is a fairly unique type of finance, and with that comes some extra factors to consider. Here are some of the areas that will play an important role in your ability to obtain development finance for a property project, and potentially impact the overall outcome:

• Type of interest rate: when setting up your interest-only development finance arrangement, you’ll be able to explore fixed or variable interest rates for the property loan. However, it is worth bearing in mind that some lenders won’t let you choose. So, it’s important to deal with the right lender for your situation.
• Term length: although this type of finance is designed to be a short-term loan, property development can take time to complete. So, in most cases you’ll find loans ranging from around 3 months to 3 years. Certain lenders will offer different rates based upon your term length. So, it’s important you deal with those who’ll provide the most favourable terms based upon your specific project plans.
• Size of development finance: each lender willing to offer a loan for the purpose of developing a property may have a lower or upper limit on how much they’ll let you borrow. For some, this can mean a minimum of anywhere between £50,000 – £1 million. Or, there will be upper borrowing limits, which can go as high as £50 million. Each lender will have their own amounts they’re comfortable with.
• High rates: a lot can go wrong with sizeable development projects, and lenders will charge higher rates of interest to offset the potential risks. Even if you’re a stellar applicant, some lenders won’t be willing to budge on rates. So, if you want to make sure you end up with the most competitive deal, it’s crucial you deal with the lender who’s going to be most accommodating to your specific plans.
• Early repayment/overpayment: with some deals you can overpay or repay early with no extra charges.
• Type of development: whether your plans involve a new build property or a refurbishment can impact the structure of your loan, and the LTV ratio some lenders are willing to offer.
• Additional fees: certain lenders offering development finance will tack on extra charges during the calculations. This can include things such as valuation fees, arrangement and security fees, and sometimes an exit fee that’s due when the loan is repaid.

Alternative finance options worth researching

If you need short-term financing to help with your property plans, development finance isn’t the only path you can take. Some alternatives routes worth considering and discussing with your broker include:

• Bridging loans: this short-term, interest-only finance has a similar structure. Except for the fact that with bridging loans, funds are paid out in a lump sum instead of increments. It can also be possible to use a bridging loan alongside development finance. Perhaps, just for the site purchase. But the scale of your project will determine whether this is worth exploring.
• Releasing equity: if you own equity in other commercial properties or development sites, you may be able to refinance and release some funds to assist with this new project.
• Commercial loans: a business loan can potentially be used for property development. Providing you can afford the monthly repayments along with the construction costs, this could be a good option for buying the land or site you’re planning to develop.
• Joint venture: if you don’t have access to a deposit, then joint venture development finance could be worth looking into. With this arrangement, lenders can offer up to 100% of the financing. And then, take a share of the profit once the property project is completed. However, this can lead to even higher interest rates. And, the profit share percentage can be in the region of 50%.
• Mezzanine finance: this won’t be a complete solution. But, it can be useful in addition to other financing, sitting alongside as a second charge loan.

Speak with a development finance property specialist

This type of loan will be tailored on a case-by-case basis. So, it’s vital that you deal with appropriate lenders who are going to be able to create the best development finance arrangement based on your specific project and personal circumstances.

We offer a free broker-matching service. This means we’ll quickly assess your plans and then introduce you to a specialist broker. One who has plenty of experience and industry contacts within this area of commercial finance.

Just call 0808 189 0463 or make an enquiry. We’ll put you in touch with an expert mortgage broker for a free initial chat and consultation.