Development Finance vs Commercial Mortgage: Which Do You Need?
One funds construction, the other funds completed assets. Understanding the distinction prevents costly mistakes.
Option A
Development Finance
A short-term facility for funding construction or major refurbishment, with staged drawdowns against verified build progress and repayment from sales or refinance at completion.
- Rate
- 6.5-10% p.a.
- Leverage
- 60-70% LTGDV
- Term
- 12-24 months
Advantages
- Designed for construction - staged drawdowns match build spend
- Leverage based on completed value (GDV), not current value
- Monitoring ensures project stays on track
- Interest only on drawn funds reduces cost during build
Disadvantages
- Short-term only - must refinance or sell at completion
- Higher rates than long-term commercial mortgages
- Requires detailed appraisal, planning, and build cost verification
- Monitoring surveyor costs at each drawdown stage
Best for
Active construction projects - new builds, conversions, heavy refurbishment requiring building regulations approval
Option B
Commercial Mortgage
A long-term secured loan against a completed commercial or mixed-use property, typically repaid over 5-25 years from rental income or business cash flow.
- Rate
- 4-7% p.a.
- Leverage
- 60-75% LTV
- Term
- 5-25 years
Advantages
- Lower interest rates than development finance
- Long-term stability with fixed or variable rate options
- Capital and interest repayment builds equity over time
- Suitable for investment hold strategies
Disadvantages
- Cannot fund construction works or major refurbishment
- Based on current value, not future value
- Early repayment charges limit flexibility
- Requires income evidence (rental or business)
Best for
Acquiring or refinancing completed commercial property, investment hold strategies, and owner-occupied business premises
Side by side
Feature-by-feature
comparison.
| Feature | Development Finance | Commercial Mortgage |
|---|---|---|
| Purpose | Funding construction works | Funding completed asset purchase/hold |
| Valuation Basis | Gross Development Value (future) | Current market value |
| Term Length | 12-24 months | 5-25 years |
| Repayment | Bullet repayment at completion | Monthly capital and interest |
| Income Required | No - repaid from sales/refinance | Yes - rental or business income |
| Fund Release | Staged drawdowns | Lump sum at completion |
| Typical Rate | 6.5-10% p.a. | 4-7% p.a. |
| Exit Strategy | Sale of units or refinance | Ongoing repayment from income |
Our verdict
Which should
you choose?
These products serve completely different purposes and are rarely interchangeable. Development finance funds the creation of value through construction. A commercial mortgage funds the acquisition or long-term holding of an existing asset. If you are building, converting, or heavily refurbishing, you need development finance. If you are buying a completed building to hold as an investment, you need a commercial mortgage.
The most common transition we arrange is from development finance into a commercial mortgage. A developer builds a commercial scheme using development finance, then refinances the completed, tenanted building onto a long-term commercial mortgage. This is a clean exit that repays the development facility and locks in a long-term hold strategy at much lower rates.
We also see developers who attempt to use a commercial mortgage to fund refurbishment works on a property they already own. While minor cosmetic works can sometimes be accommodated within a commercial mortgage, anything requiring planning permission, building regulations, or structural works should be funded through a development or refurbishment finance facility.
Common questions
Frequently asked
questions.
Can I get a commercial mortgage to fund property development?
No. Commercial mortgages are designed for completed, income-producing properties. They do not fund construction works, staged drawdowns, or speculative development. You need development finance or refurbishment finance for any project involving significant building works.
Can I refinance development finance onto a commercial mortgage?
Yes - this is one of the most common exit strategies for development finance. Once your scheme is complete and tenanted (for commercial or BTR), you refinance the short-term development facility onto a long-term commercial mortgage at a lower rate. We can arrange both the development finance and the exit mortgage from our lending panel.
What if my project is both acquisition and refurbishment?
If the refurbishment is light (cosmetic, no building regs), a bridging loan with a refurbishment element may work. If it involves structural works or building regulations, you need either a heavy refurbishment bridging facility or full development finance. A specialist broker can assess which product fits your specific scope of works.
Ready when you are
Not sure which
product you need?
Tell us about your scheme and we'll recommend the right finance structure. Indicative terms from the panel within one working day.