Non-Utilisation Fees: The Charge for Money You Haven't Borrowed

A non-utilisation fee is a charge levied by the lender on the portion of your development finance facility that has been committed but not yet drawn down. In development finance, the full facility is agreed at the outset but funds are released in stages as construction progresses. The undrawn portion of the facility represents committed capital that the lender must reserve, and some lenders charge a fee for holding this capital available. The fee is typically expressed as a percentage per annum of the undrawn balance, ranging from 0.5% to 2%.

To illustrate: if your total facility is £3,000,000 and you have drawn £1,000,000, the undrawn balance is £2,000,000. At a non-utilisation rate of 1% per annum, you would be charged £20,000 per year on the undrawn amount, or approximately £1,667 per month. As you draw down more of the facility, the undrawn balance decreases and so does the non-utilisation charge. However, in the early stages of a project when you have only drawn the land element and the bulk of the construction facility remains undrawn, the non-utilisation fee can be a material cost.

Non-utilisation fees are one of the less well-known charges in development finance, and many developers are surprised to discover them in the facility documentation. They are more common among bank lenders and institutional funds than among specialist development finance providers, but they do appear across the market. In our experience arranging facilities across the UK, approximately 25% to 30% of lenders include a non-utilisation fee in their standard terms, although it can often be negotiated or removed entirely.

From the lender's perspective, a non-utilisation fee compensates them for the cost of reserving capital that could otherwise be deployed elsewhere. When a lender commits a £3,000,000 facility to your project, they allocate that capital from their funding lines and cannot lend it to another borrower. If the construction programme is slower than expected and you draw funds over 18 months rather than 12, the lender has capital sitting idle for six additional months. The non-utilisation fee ensures the lender earns a return on committed but undrawn capital.

This rationale is more relevant for bank lenders who have regulatory capital requirements. Banks must hold capital reserves against committed facilities, even if those facilities have not been drawn, which creates a real cost to the bank. Non-bank lenders, such as private credit funds and bridging specialists, typically have more flexible capital structures and are less likely to impose non-utilisation fees. This is one reason why non-bank lenders have become increasingly popular for development finance in the UK, particularly among developers who value cost transparency.

There is also a behavioural element to non-utilisation fees. By charging for undrawn capital, the lender creates an incentive for the developer to draw funds efficiently and keep the construction programme on track. In theory, this aligns the interests of the borrower and lender because both benefit from a project that completes on time and on budget. In practice, however, the non-utilisation fee can penalise developers for circumstances beyond their control, such as planning delays, weather, or supply chain issues, which makes it a somewhat blunt instrument.

The total cost of non-utilisation fees over the life of a project depends on the facility size, the drawdown profile, and the non-utilisation rate. On a typical residential development with a £2,500,000 facility, a 12-month build programme, and a non-utilisation rate of 1% per annum, the total non-utilisation charge might be calculated as follows. In month one, you draw £800,000 for land, leaving £1,700,000 undrawn. Over the next 11 months, you draw the remaining £1,700,000 in roughly equal tranches. The average undrawn balance over the facility term is approximately £850,000, and 1% of £850,000 is £8,500.

While £8,500 may seem modest in the context of a £2,500,000 facility, it is an additional cost that sits on top of interest, arrangement fees, legal fees, and all the other charges associated with the loan. It is also a cost that many developers do not account for in their initial appraisals because they are focused on the headline interest rate and arrangement fee. When we model the true cost of development finance for our clients, we include the non-utilisation fee in the total cost calculation, which can add 0.3% to 0.5% to the effective annual cost of the facility.

On larger facilities, the impact is proportionally greater. A £10,000,000 facility with a non-utilisation rate of 1.5% and a slower drawdown profile could generate £45,000 to £60,000 in non-utilisation charges over an 18-month build programme. For developers working on schemes with tight margins, this is a cost that can meaningfully affect project viability. We always flag non-utilisation fees to our clients when comparing term sheets, because the lender with the lowest headline interest rate is not necessarily the cheapest once all charges are included.

The most direct approach is to select a lender who does not charge non-utilisation fees. As we noted, roughly 70% of development finance lenders in the UK do not include this charge, so there is a good chance that the best-fit lender for your project does not have one. When you submit your project through our deal room, we include non-utilisation fees in our cost comparison so you can see the full picture.

If you are working with a lender who does charge non-utilisation fees, consider structuring the facility to minimise the undrawn balance. One approach is to set the facility amount as close as possible to your actual funding requirement, rather than building in a large contingency at the facility level. If your base build cost is £1,500,000 and your contingency is £150,000, consider whether the contingency needs to be included in the committed facility or whether you can fund it from equity if needed. Reducing the facility from £1,650,000 to £1,500,000 reduces the undrawn balance and therefore the non-utilisation charge.

Another strategy is to negotiate a drawdown schedule that front-loads the facility utilisation. If you can draw a larger proportion of the facility early in the project, perhaps by including site preparation costs, demolition, or infrastructure works in the first drawdown, the average undrawn balance will be lower over the facility term. This requires careful coordination with the monitoring surveyor to ensure that the early drawdowns are supported by corresponding value on site, but it can meaningfully reduce the total non-utilisation charge.

Non-utilisation fees are sometimes confused with commitment fees, but they are distinct charges. A commitment fee is a one-off charge payable when the lender agrees to make the facility available, typically 0.25% to 0.5% of the total facility. It compensates the lender for the administrative cost of setting up the facility and is usually non-refundable. A non-utilisation fee is an ongoing charge that accrues throughout the facility term on the undrawn balance.

Some lenders charge both a commitment fee and a non-utilisation fee, which compounds the cost of the facility. A £3,000,000 facility with a 0.5% commitment fee (£15,000) and a 1% non-utilisation fee (estimated at £10,000 over the term) adds £25,000 in charges before you even consider the arrangement fee, interest, and other costs. This layering of fees is one of the hidden costs that make it essential to read the full term sheet carefully rather than comparing offers on headline rates alone.

In our experience, lenders who charge commitment fees tend to be more institutional in their approach, such as clearing banks and large non-bank lenders. Specialist development finance lenders, who make up the majority of our panel, generally do not charge commitment fees. This is another advantage of working with a specialist broker who can direct you to lenders with simpler, more transparent fee structures. The right lender for your project is not always the one with the biggest name, but the one whose total cost of finance, including all ancillary charges, delivers the best value for your specific scheme.

Including non-utilisation fees in your development appraisal requires modelling the expected drawdown profile of your facility and applying the non-utilisation rate to the undrawn balance at each stage. Most development appraisal software, such as Argus Developer, allows you to model phased drawdowns and can calculate the non-utilisation charge if you input the relevant parameters. If you are using a spreadsheet model, create a row for the undrawn balance in each period and apply the non-utilisation rate to calculate the charge.

For a quick estimate at the feasibility stage, you can use the average undrawn balance method. Assume that you draw the land element on day one and then draw the construction facility evenly over the build programme. The average undrawn construction balance is approximately 50% of the total construction facility. Multiply this by the non-utilisation rate and the facility term to get an approximate total charge. This will not be precise, but it gives you a reasonable estimate to include in your initial appraisal.

As an example, consider a scheme in Hertfordshire with a £4,000,000 total facility comprising £1,500,000 for land and £2,500,000 for construction, a 15-month build programme, and a non-utilisation rate of 1%. The land is drawn on day one, so the undrawn construction balance starts at £2,500,000 and decreases to zero over 15 months. The average undrawn balance is approximately £1,250,000. At 1% per annum, the non-utilisation charge is approximately £15,625 over the 15-month term. This is a material cost that should be visible in your appraisal alongside other finance charges.