Extension Fees on Development Loans: When Your Project Runs Over

Extension fees are charges levied by the lender when you need to extend your development finance facility beyond its original term. Development finance facilities are typically granted for a fixed period, usually 12 to 24 months, aligned to your projected build programme plus a sales or refinance period. If your project is not completed and the loan not repaid by the maturity date, you will need to request an extension. The fee for this extension is typically 1% to 2% of the outstanding loan balance, payable upfront for each extension period granted.

Extension fees apply in addition to the ongoing interest charges, which themselves may increase during the extension period. Some lenders maintain the original interest rate during extensions, while others apply a higher rate, sometimes called a default rate or penalty rate, which can be 2% to 5% above the original rate. The combination of extension fees and increased interest creates a significant financial penalty for overrunning, which is precisely the lender's intention: they want their capital returned on time.

In our experience, approximately 30% to 40% of development finance facilities require at least one extension. Construction projects are inherently susceptible to delays from weather, supply chain issues, planning complications, subcontractor availability, and dozens of other factors. This means extension fees are not an edge case but a common cost that developers should plan for. Yet in our review of development appraisals submitted to us, fewer than 20% include any provision for extension costs, which is a significant oversight.

The most common extension fee structure is a flat percentage of the outstanding balance, charged per extension period. A typical extension might be granted for three months at a fee of 1% of the outstanding balance. On a facility where £2,500,000 is outstanding at the point of extension, the fee is £25,000 for three additional months. If you need a further extension after the first, another 1% fee applies, adding another £25,000. Two extensions on the same facility can therefore cost £50,000 in fees alone, before considering additional interest.

Some lenders offer pre-agreed extension options, where the extension terms are documented in the original facility agreement. This is a more borrower-friendly approach because it provides certainty about the cost of an extension and removes the risk of the lender refusing to extend. Pre-agreed extensions are typically priced at a premium, perhaps 1.5% per extension period, but the certainty they provide is often worth the additional cost. We always negotiate for pre-agreed extension options when arranging facilities for our clients, because the alternative, negotiating an extension under time pressure when the loan is about to mature, puts the borrower in a weak position.

A less common but more punitive structure is the extension fee calculated on the original gross facility rather than the outstanding balance. If you have repaid £1,000,000 of a £3,000,000 facility through unit sales but need an extension on the remaining £2,000,000, some lenders will charge the extension fee on the original £3,000,000 rather than the current £2,000,000 balance. This adds 50% to the effective extension cost and is one of the hidden charges that developers should look out for in the facility documentation.

Understanding why projects overrun helps you assess the likelihood that you will need an extension and budget accordingly. The most common causes we see are contractor delays, which account for approximately 40% of overruns on the schemes we finance. Subcontractor availability, material shortages, and disputes between the main contractor and subcontractors all contribute to programme slippage. Using a reputable design-and-build contractor with a fixed-price contract can mitigate this risk, although it does not eliminate it entirely.

Planning and building control issues cause approximately 20% of overruns. Conditions attached to the planning permission may take longer to discharge than anticipated, or building control inspections may identify issues that require remedial works. Weather-related delays account for a further 15% to 20% of overruns, particularly on projects with significant groundworks or external works during the winter months.

We recommend building a three-month buffer into your build programme when determining the loan term. If your contractor quotes a 12-month programme, request a 15-month facility. The additional three months of non-utilisation cost is minimal compared to the extension fee you would pay if the project runs over. On a £2,000,000 facility, a three-month buffer might cost £2,500 to £5,000 in additional interest on the drawn balance, compared to a £20,000 extension fee if you need to extend at maturity. This is a simple risk management strategy that we advise all our clients to adopt, whether they are building in Greater London, Lancashire, or anywhere in between.

The best time to negotiate extension terms is before you sign the facility agreement, not when the loan is about to mature and you are under pressure. At the initial term sheet stage, ask explicitly about the extension provisions: how many extensions are available, what is the fee for each, what interest rate applies during the extension, and is the extension at the lender's discretion or contractually committed.

Pre-agreed extension options are the gold standard. These are contractual commitments by the lender to extend the facility for a specified period at a specified cost, provided certain conditions are met. The conditions are usually straightforward: no event of default, the project is progressing satisfactorily, and the monitoring surveyor confirms that completion is within a reasonable timeframe. We typically negotiate for two pre-agreed three-month extensions as part of the standard facility terms, giving the borrower up to six months of additional time if needed.

If pre-agreed extensions are not available, negotiate the extension fee percentage down from the lender's standard rate. Many lenders will reduce the extension fee from 2% to 1% or even 0.75% as part of the overall deal negotiation, particularly for experienced developers with a strong track record. We have also successfully negotiated for extension fees to be calculated on the outstanding balance rather than the original facility, which can save tens of thousands of pounds on facilities where partial repayments have been made. Submit your project through our deal room and we will ensure that extension terms are included in our negotiation strategy from the outset.

If your facility reaches maturity and the lender either refuses to extend or demands terms that are commercially unacceptable, you face a potentially serious situation. The loan becomes repayable immediately, and if you cannot repay it, the lender may begin enforcement proceedings, which could ultimately lead to the appointment of a receiver and the sale of the site at a discount to market value.

In practice, this outcome is relatively rare because it is not in the lender's interest to force a sale of a partially completed development. A half-built site has limited value, and the lender is likely to recover more by allowing the project to complete and selling the finished units. However, lenders do use the threat of enforcement as leverage to negotiate punitive extension terms, knowing that the borrower has limited alternatives at this stage.

The best protection against this scenario is to maintain open communication with the lender throughout the project. If you anticipate that the build programme will overrun, inform the lender and your broker well before the maturity date. A lender who is given three months notice of a likely extension is far more likely to be accommodating than one who is told at the last minute. We act as a buffer between our clients and lenders in these situations, managing the communication and negotiating extension terms that protect the borrower's position. In some cases, we have arranged a refinance to a different lender to exit a facility where the original lender's extension terms were unacceptable. This is why maintaining a relationship with a broker who has access to a wide panel of lenders is so important.

Given that 30% to 40% of development finance facilities require an extension, we believe every development appraisal should include a contingency for extension costs. At a minimum, budget for one three-month extension at 1% of the projected outstanding balance at maturity. If your facility is £2,500,000 and you expect £2,000,000 to be outstanding at the original maturity date, include a £20,000 extension fee contingency. Also budget for three additional months of interest on the outstanding balance, which at 9% per annum would be approximately £45,000.

In total, a single extension on this facility would cost approximately £65,000 when combining the extension fee and additional interest. That is a significant sum that can transform a profitable scheme into a marginal one if it is not anticipated. For schemes in areas with higher build costs, such as Greater London and Surrey, where facility sizes tend to be larger, the absolute cost of extensions is correspondingly higher.

We recommend presenting two scenarios in your development appraisal: a base case that assumes the project completes on time, and a stressed case that includes one extension period with the associated fees and additional interest. If the scheme is viable in both scenarios, you can proceed with confidence. If the stressed case pushes the profit margin below your acceptable threshold, you may need to increase your equity contribution, negotiate better finance terms, or reconsider the scheme's viability. This disciplined approach to feasibility analysis, as we also cover in our guide on calculating GDV, is what separates successful developers from those who are caught out by the realities of construction.