Interest Rate Trends in Development Finance: What Developers Should Expect

The period from 2020 to 2026 has been one of the most volatile for interest rates in recent memory, and development finance has not been immune. In early 2020, with the Bank of England base rate at 0.75% and soon to fall to a historic low of 0.10%, development finance rates for experienced developers sat at approximately 5-7% per annum. The ultra-low base rate environment, combined with aggressive competition among lenders, meant that developers enjoyed some of the cheapest borrowing in the sector's history. Arrangement fees were typically 1-1.5%, and several lenders offered no exit fees at all.

The landscape shifted dramatically from late 2021 onward. As inflation surged — driven initially by post-pandemic supply chain disruption and then by the energy crisis following the conflict in Ukraine — the Bank of England embarked on the most aggressive tightening cycle in decades. The base rate rose from 0.10% in December 2021 to 5.25% by August 2023. Development finance rates followed, with typical pricing rising to 9-13% for senior debt. Some lenders withdrew from the market entirely, while others tightened criteria so severely that they were effectively closed for new business.

The mini-budget crisis of September 2022 added further stress. Swap rates spiked, and several lenders pulled products overnight. For a brief period, some developers found themselves unable to refinance or exit facilities at maturity, leading to a wave of loan extensions and, in some cases, enforcement action. This period underscored the importance of building interest rate contingency into every development appraisal — a lesson that continues to inform best practice.

As of early 2026, the Bank of England base rate has come down from its peak, providing meaningful relief to borrowers. Development finance rates for mainstream residential schemes with experienced developers now range from 6.5% to 9.5% per annum. The spread between the cheapest and most expensive lenders has widened compared to the pre-2022 era, reflecting the divergence in funding costs and risk appetites across different lender types.

Bank-backed development lenders — those funded by retail deposits or wholesale markets — tend to offer the lowest headline rates but impose stricter criteria around borrower experience, minimum scheme size, and pre-sales requirements. A typical offering from this segment might be 6.5-8% with 60-65% LTGDV and an arrangement fee of 1.5%. Non-bank lenders and private credit funds, which dominate the higher-leverage end of the market, typically price at 8-10% but offer leverage of 65-75% LTGDV and faster execution. In our experience, the all-in cost of borrowing (including fees) is often more similar than headline rates suggest, because bank lenders tend to charge higher ancillary fees.

The key driver of where your rate sits within this range is the interaction of four factors: your track record as a developer, the strength of the scheme (location, planning status, comparable evidence), the leverage required, and the speed at which you need to complete. A developer with ten completed schemes seeking 60% LTGDV for a fully permitted residential site in Hampshire will attract fundamentally different pricing to a first-time developer seeking 70% LTGDV for a mixed-use scheme with outline planning in a secondary location.

Many developers assume that development finance rates move in lockstep with the Bank of England base rate. The reality is more nuanced. While the base rate is an important input, development finance pricing is influenced by a broader set of factors including lender funding costs, credit appetite, competitive dynamics, and scheme-specific risk assessment.

During the rising rate cycle of 2022-2023, development finance rates increased by more than the base rate rise alone would suggest. This was because lenders were simultaneously repricing for increased credit risk (as higher rates threatened scheme viability and sales values) and in some cases facing higher funding costs in the wholesale markets. The risk premium — the margin above a lender's cost of funds — expanded significantly. Conversely, as conditions have stabilised, margins have compressed as lenders compete for a limited pool of quality transactions.

For practical purposes, we advise developers to model their finance costs assuming rates remain stable over the life of the facility, with a stress test of at least 1-2% above the quoted rate. Most development finance facilities are relatively short term (12-24 months), which limits the impact of rate movements. However, for longer programmes or phased developments, the cumulative impact of rate changes on rolled-up interest can be substantial. On a £3,000,000 facility at 8% with interest rolling up over 18 months, total interest costs would be approximately £360,000. A 2% rate increase would add roughly £90,000 to that figure — a meaningful impact on project profitability.

Fixed-rate development finance products, which have become more widely available in 2026, offer a solution for developers who want certainty. These typically carry a premium of 0.25-0.50% over variable rates but eliminate the risk of rate movements during the build. For schemes where margins are tight, the additional cost of fixing can be a prudent form of insurance.

Interest rates do not tell the whole story. The total cost of development finance includes arrangement fees, exit fees, monitoring surveyor costs, valuation fees, and legal fees. Understanding how these have evolved provides a fuller picture of the true cost of borrowing.

Arrangement fees have been remarkably stable, sitting at 1-2% of the gross facility throughout the 2020-2026 period. The main shift has been in how they are charged — some lenders now offer reduced upfront fees with a higher exit fee, or vice versa. This gives developers flexibility to manage their day-one cash requirements. Exit fees, which became more common during 2023-2024 as lenders sought to protect their returns in a higher-rate environment, are now being competed away. We have negotiated the removal of exit fees on numerous facilities in recent months, particularly where the developer has a strong relationship with the lender.

Monitoring surveyor and valuation fees have increased broadly in line with inflation. A monitoring surveyor visit that cost £500-£750 in 2020 now typically costs £750-£1,500. Valuation fees for a scheme with a GDV of £5,000,000 have risen from around £3,000 to £4,000-£6,000. These are costs that developers should factor into their appraisals but which are often underestimated. On a 12-month build with monthly monitoring visits, surveyor fees alone could total £10,000-£18,000.

Legal fees are another area where costs have risen. Development finance transactions involve dual representation — the developer's solicitor and the lender's solicitor — and combined legal costs of £15,000-£30,000 are common for facilities above £2,000,000. Some lenders have introduced panels of approved solicitors who offer fixed-fee packages, which can help control costs. We always recommend obtaining legal fee quotes early in the process to avoid surprises at completion.

Our view is that development finance rates are likely to remain broadly stable through 2026, with potential for modest further reductions if the base rate continues to fall. The competitive dynamics in the market — with non-bank lenders continuing to raise capital and expand their books — should keep downward pressure on pricing. We would not be surprised to see rates for prime schemes dip below 6% by the end of the year, although this will be contingent on macroeconomic conditions.

The more significant trend is likely to be in leverage rather than rates. As lender confidence grows, we expect to see LTGDV ratios continue to creep upward, making schemes viable for a wider range of developers. The availability of mezzanine finance at more competitive rates is already expanding the pool of fundable projects, and we expect this to continue.

For developers planning schemes in 2026, our advice is straightforward. Model your finance costs conservatively, build in contingency for rate movements and programme delays, and ensure your appraisal works even under stressed assumptions. The market is supportive, but discipline in financial planning remains essential. If you would like a current view on rates and terms for your specific scheme, submit your details through our deal room and we will provide a tailored indication within 48 hours.

Securing the most competitive rate is not just about having a strong scheme — it is about how you present and structure the opportunity. In our experience arranging hundreds of development finance facilities, several strategies consistently deliver better outcomes for borrowers.

First, engage a specialist broker. The development finance market is opaque, with many lenders not publishing their rates or criteria. A broker with established lender relationships can access terms that are not available direct, and can leverage competitive tension between lenders to drive better pricing. The broker fee (typically 1% of the facility) is almost always recouped through better terms than a developer could negotiate independently.

Second, prepare a comprehensive information pack before approaching lenders. This should include a detailed development appraisal, planning permission documentation, contractor tender(s) or QS cost plan, comparable sales evidence, your CV and track record of completed schemes, and a clear programme. Lenders who receive a complete, professional pack from day one can underwrite faster and are more inclined to offer competitive terms. As explained in our guide on how development finance works, preparation is the single biggest determinant of outcome.

Third, consider the total cost of borrowing, not just the headline rate. A facility at 7% with a 2% arrangement fee and a 1% exit fee may be more expensive overall than one at 7.5% with a 1% arrangement fee and no exit fee. We model the total cost of finance for every facility we arrange, allowing developers to make like-for-like comparisons and choose the product that genuinely represents the best value.