Property Development Loans: How Development Finance Works

Property development finance is an umbrella term. The right type of funding depends on what you are building, whether planning permission is in place and how far the project has progressed. These are the main types of property development loans and the related property finance products developers use alongside them.

The most common type funds new-build houses and flats for sale or rent. Lenders are most comfortable with residential development because residential property has the deepest sales and mortgage market, so residential schemes usually attract the highest leverage and the keenest rates. Most lenders want full planning permission and clear evidence of demand for the finished residential property.

Offices, industrial units, retail, hotels and mixed-use schemes are funded on similar principles, but lenders look harder at the exit because commercial property values depend on tenants and yields. Pre-lets, or a forward sale to an investor, make commercial development finance much easier to raise, and leverage is often a little lower than for residential projects.

Converting offices, barns or other commercial buildings into homes, or carrying out structural refurbishment, is funded with development finance or refurbishment finance, depending on the scale of the works and whether the building is habitable during them.

Most development lenders will not fund the build on a site without planning permission. Developers therefore often buy land with bridging loans, secure planning, and then refinance onto development finance when construction starts. Bridging loans are priced monthly, typically from 0.55% per month, and are sized against the current value of the site rather than the finished scheme.

Mezzanine finance, which tops up senior debt, and development exit loans, which refinance a completed scheme while the units sell, are covered in the exits and capital stack section below.

The UK development lending market is wider than most first-time borrowers expect. High street banks are still active, but a large share of small and mid-sized schemes is now funded by challenger banks, specialist development lenders and debt funds. Banks are authorised by the Prudential Regulation Authority (PRA) and regulated by both the PRA and the FCA; non-bank lenders and debt funds lend their own or their investors' capital. Development finance lenders in each group have a different appetite for scheme size, developer experience and leverage, which is why the same project can receive very different terms from different lenders.

Because criteria vary so much, the lender that suits a first four-house scheme is rarely the lender that suits a 40-unit block. A bank may offer the lowest rates to an experienced developer with a straightforward residential scheme, while a specialist property finance lender may be the only realistic option for a first project, a conversion or a tight programme. When choosing, compare the total cost of funding, the leverage, the drawdown process and the lender's track record of funding similar projects, not just the headline rate. As a broker, we arrange finance rather than lend it, and the final decision is always yours: we work with a panel of 100+ lenders and match each scheme to the part of the market most likely to fund it on good terms. Our founder, Matt Lenzie, has more than 25 years in property finance and has arranged over £500M of funding across his career.

How much you can borrow is decided by three ratios, and lenders apply all of them at once, whether the scheme is residential property or commercial. The facility you are offered is the lowest figure any of them produces.

LTGDV is the ceiling most lenders quote. It protects them if sale prices fall: at 65% LTGDV, values could drop by a third before the loan was at risk. LTC protects them from a developer with too little money in the deal, because a borrower with meaningful equity at stake is more likely to manage the build carefully. The land advance limit reflects the fact that a bare site with planning is the least liquid part of the security.

In practice, most developers need to fund roughly 10% to 35% of total costs themselves, depending on how the ratios interact. The cash usually goes in first, as the balance of the land price, stamp duty and professional fees, and the lender funds the build. If you need to reduce that equity, mezzanine finance or a joint venture partner can fill part of the gap, which we cover in the capital stack section below. Our development finance calculator will size a facility on your own numbers in a couple of minutes.

After the land advance, build money is released in tranches, usually monthly, against work that has already been done. The lender appoints an independent monitoring surveyor, typically a RICS-qualified quantity surveyor or building surveyor, who reviews the project before the loan completes and then visits the site before each drawdown to confirm progress and costs. Our guides to monitoring surveyor valuations and drawdown schedules cover the mechanics in depth; the typical cycle looks like this.

Two practical points catch developers out. First, drawdowns are paid in arrears, so you need working capital or contractor credit terms to cover the gap between paying for work and receiving the tranche. Second, any cost overrun is normally funded by you before the lender releases further money, because the lender's commitment is fixed to the approved budget. A realistic contingency, usually 5% to 10% of build costs, is part of the loan application for exactly this reason.

Development finance interest is normally rolled up. Rather than paying monthly, the interest is added to the loan balance and repaid with the principal when the scheme is sold or refinanced. Most lenders calculate interest daily and compound it monthly, and it is charged only on money actually drawn, so the land advance accrues interest from day one while each build tranche accrues interest from the date it is released. Some lenders instead retain an interest reserve within the facility. Our guide to interest roll-up explains the options and the compounding effect.

Because interest is rolled up, the lender builds it into the loan from the start. The facility has a net figure (the money you can actually spend on land and build) and a gross figure (net plus rolled-up interest and fees). LTGDV limits apply to the gross figure, which is why a longer build programme can reduce how much you can borrow for construction.

These figures are indicative, not offers, and pricing moves with the wider rate environment: at the time of writing (September 2026), Bank Rate stands at 3.75%, held at the 16 September Monetary Policy Committee meeting. Headline rates only tell part of the story, because of the other fees involved; a lower rate with a large exit fee can cost more than a higher rate with none. Our guide to the true cost of development finance shows how to compare offers on a total-cost basis.

When you apply for property development finance, the lender is assessing the project as much as the borrower. Before you apply, have the core documents ready: planning permission and drawings, a cost plan or contractor tender, the build programme, comparable sales evidence, details of your professional team and a summary of your experience. If you are looking at a site but have not yet bought it, it is worth testing fundability before you commit.

Every development loan starts with an appraisal: a spreadsheet showing the GDV, every cost line, the finance costs and the resulting profit. Lenders read it alongside the valuer's report, so the numbers must be supported by evidence rather than optimism. Our guide to development appraisals for lenders sets out the format they expect, and our development appraisal calculator will produce a first version for you.

Lenders then assess four things. The site and planning: most senior lenders want full planning permission, or reserved matters approved, with pre-commencement conditions discharged or dischargeable. The numbers: residential schemes generally need around 20% profit on GDV, with build costs backed by a quantity surveyor's cost plan or contractor tender. The team: the developer's track record, and the experience of the contractor, architect and project manager. The exit: comparable sales evidence for similar residential property, or a realistic refinance case if units will be retained.

A typical timeline from the day you apply to the first drawdown is four to eight weeks: a few days for terms in principle, one to two weeks for the valuation and monitoring surveyor's initial report, then legal work and credit approval. Lenders will also usually ask for personal guarantees from the directors of the borrowing company, a point worth understanding before you sign; see our guide to personal guarantees.

For illustration, consider a developer buying a bare site with full planning permission for four detached houses through a new SPV. Each house is expected to sell for £620,000, giving a GDV of £2,480,000. The build takes 12 months and the sales period is assumed to be a further six months, so the loan runs for 18 months. The indicative rate is 8.5% p.a., reflecting a smaller developer.

The SDLT figure assumes a bare site with no dwelling on it, taxed at non-residential rates: nil on the first £150,000, 2% on the next £100,000 (£2,000) and 5% on the remaining £450,000 (£22,500), giving £24,500. A site with a house on it would be taxed very differently, so take specialist advice on your own purchase.

The interest is worked out in three parts, using simple interest for clarity. The £420,000 land advance is drawn for the full 18 months: £420,000 × 8.5% × 1.5 = £53,550. The £880,000 build and contingency budget is drawn steadily over the 12-month build, so on average half of it is outstanding for that year: £440,000 × 8.5% = £37,400; it is then fully drawn for the six-month sales period: £880,000 × 8.5% × 0.5 = £37,400. The £26,000 arrangement fee is added on day one and accrues for 18 months: £26,000 × 8.5% × 1.5 = £3,315. Total interest is £53,550 + £37,400 + £37,400 + £3,315 = £131,665. In practice lenders compound monthly, which would add a little, while selling some houses before month 18 would reduce it.

The example shows why the ratios matter. If the valuer put GDV at £2,200,000 instead, the same loan would be 66.3% LTGDV, and profit would fall to £276,335 (with sales costs of £44,000), just 12.6% on GDV, below most lenders' threshold. The facility would be cut back and the developer would need more equity. Test your own figures with our development finance calculator before you commit to a site.

A development loan is only as strong as its exit. There are three common routes. Sale of the units is the most usual for residential schemes, with the lender taking most or all of each sale's net proceeds until the loan is repaid. Refinance onto longer-term mortgages, such as buy-to-let or commercial mortgages, suits developers who plan to keep the finished units and let them. A bulk or forward sale to an investor or registered provider can give certainty from the outset and often improves terms.

Where sales take longer than planned, a development exit loan can refinance the development facility at practical completion, usually at a lower rate, and give the developer time to sell without paying development-rate interest or default charges. Lenders like to see this considered in the original plan. Our guide to development finance exit strategies covers each route in detail, and the development exit calculator shows the likely saving.

The development loan described so far is senior debt: it takes the first charge and is repaid first. When the senior facility and the developer's cash do not cover the full cost, the gap is filled by other layers, collectively known as the capital stack. Our guide to the capital stack in property development explains how the layers interact; in outline they are these.

More leverage means less of your own cash, but a thinner margin for error and a larger share of profit paid away. Adding mezzanine finance makes sense when the scheme's margin can absorb the extra cost; where you have a strong site but little capital, an equity or joint venture partner may be the better route.

We are an independent property finance broker, not a lender. We review your appraisal before any lender sees it, identify the weak points a credit committee will focus on before it makes a decision, and then approach the lenders on our panel whose criteria genuinely fit the scheme. You receive indicative terms side by side, compared on total cost rather than headline rate, and we then manage the valuation, monitoring surveyor, legal work and drawdown set-up through to completion.

If you have a site in mind, or you are testing whether a scheme stacks up, send us the numbers when you are ready. Read more about our development finance service, or submit your deal and we will come back with a view on leverage, pricing and the lenders most likely to fund it.