Planning a property development? Here's how to fund it from land purchase to completion.
Property development finance is specialist short-term lending used to fund the purchase and construction or refurbishment of residential or commercial property for profit. Unlike a standard mortgage, development finance is designed for projects where the property will be significantly altered, converted, or built from scratch before being sold or refinanced.
This type of finance covers everything from converting a single house into flats to building an entire housing estate. Lenders typically advance funds in stages (known as drawdowns) as the project progresses, rather than releasing the full amount upfront. Loan terms are usually 6–24 months, reflecting the short-term nature of development projects.
Ground-up development finance funds the construction of new buildings on a plot of land. This includes purchasing the land, demolishing existing structures if necessary, and funding the entire build. Lenders typically fund up to 60–70% of the land cost and up to 100% of the build costs, with the total loan not exceeding 65–70% of the completed project's value (known as the gross development value or GDV).
Refurbishment finance is for projects involving significant works to an existing property, such as structural changes, extensions, or full renovation. Light refurbishment finance (for cosmetic works costing under 15% of the property value) is simpler to arrange, while heavy refurbishment finance (for structural works, change of use, or works exceeding 15% of property value) requires more detailed plans and costings.
Development finance is more expensive than standard mortgages because of the higher risk involved. Typical costs include:
Interest rates range from 6–12% per annum for experienced developers with strong track records, to 12–18% for first-time developers or higher-risk projects. Interest is usually rolled up (added to the loan balance rather than paid monthly), so you do not need to service the debt during the build phase.
Arrangement fees of 1–2% of the loan amount are charged by the lender. Exit fees of 0.5–1.5% may apply when the loan is repaid. Monitoring fees of £500–£1,500 per drawdown cover the cost of the lender's surveyor inspecting progress before releasing the next tranche of funds. Valuation and legal fees add a further £2,000–£5,000 depending on the project size.
⚠️ Development finance costs can add 15–25% to the total project cost. Factor all finance costs into your feasibility assessment before committing to a project. If the projected profit margin is below 20–25% of GDV, there may not be sufficient buffer to absorb cost overruns and still make the project viable.
Development finance lenders assess the project as much as the borrower. They want to see a viable development that will generate sufficient value to repay the loan with a comfortable margin. Key assessment criteria include:
💡 If you are a first-time developer, consider starting with a smaller project such as a single-unit refurbishment or conversion. Building a track record with successful smaller projects makes it significantly easier and cheaper to secure finance for larger developments.
Applying for development finance typically takes 2–6 weeks from initial enquiry to funds being available. You will need to provide a detailed development appraisal showing purchase costs, build costs, professional fees, finance costs, and the projected GDV. Supporting documents include architectural plans, planning permission, build cost estimates from a quantity surveyor, and comparable sales evidence supporting the GDV.
The lender will instruct an independent valuation of the site and the projected GDV. They may also appoint a monitoring surveyor to oversee the project and sign off on each drawdown stage. Experienced developers with established lender relationships can often fast-track the process.
Development finance is a specialist area, and the best deals are often only available through brokers who have established relationships with development lenders. A specialist broker can package your application, negotiate terms, and access funding from lenders that do not deal directly with the public.
Nesto connects property developers with FCA-regulated finance brokers who specialise in development lending. Find a specialist finance broker through Nesto and fund your next development project.
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