Second Charge Development Finance: When You Already Own the Land

Second charge development finance is a facility secured against a property where an existing first charge, typically a mortgage or existing loan, remains in place. Rather than repaying the first charge and replacing it with a single new development finance facility, the second charge sits behind the existing lender in priority. This means that if the property were sold or repossessed, the first charge holder would be repaid in full before the second charge lender receives anything. This subordinated position represents higher risk for the second charge lender, which is reflected in higher interest rates and more conservative lending criteria.

Second charge development finance is most commonly used when a developer already owns the site and has an existing mortgage or loan secured against it that cannot be easily refinanced, either because of early repayment charges, a favourable interest rate that the borrower wants to retain, or contractual restrictions that prevent early repayment. Rather than disrupting the existing financial arrangement, the developer takes out a separate development finance facility secured as a second charge to fund the construction works. The first charge covers the original acquisition financing, and the second charge covers the build costs.

In our experience, second charge structures account for approximately 10-15% of the development finance deals we arrange. They are particularly common among developers who have built a land bank over time, purchasing sites with standard mortgages or bridging loans and then seeking construction finance when they are ready to develop. Understanding when a second charge is appropriate and how it compares to refinancing into a single facility is important for making the right financial decision for your project.

The primary situation where second charge development finance makes sense is when the first charge has favourable terms that would be lost through refinancing. If you acquired a site two years ago with a bridging loan at 0.65% per month and have since renegotiated this onto a low-cost term loan at 4.5% per annum with no early repayment charges for the remaining term, refinancing this into a development finance facility at 8-9% would increase your overall cost of borrowing. A second charge for the construction costs only, leaving the cheap first charge in place, could deliver a lower blended cost than a single refinanced facility.

Second charge is also useful when the first charge lender does not offer development finance. If your site is held on a standard commercial mortgage with a mainstream bank that does not have a development finance product, you would normally need to repay the mortgage and move to a specialist development finance lender. If the mortgage has significant early repayment charges, perhaps 2-3% of the outstanding balance, the cost of breaking the mortgage can be substantial. On a £500,000 mortgage, early repayment charges of £10,000 to £15,000 add directly to your project costs. A second charge avoids this cost entirely.

However, second charge development finance is not always the optimal solution. The interest rate on second charge facilities is typically 2-4% higher than an equivalent first charge facility because of the lender’s subordinated security position. On a £1,000,000 construction facility over twelve months, this premium costs an additional £20,000 to £40,000 in interest. If the savings from retaining the first charge, such as avoided early repayment penalties or a favourable interest rate differential, do not exceed this premium, a single refinanced facility is likely to be more cost-effective. We model both options for every client in this situation, comparing the total cost of each approach to identify the genuinely optimal structure.

The most critical requirement for a second charge development finance facility is the consent of the first charge holder. The first charge lender must agree to the second charge being placed on the property, as their existing security documentation almost certainly includes a restriction on further charges without their consent. Obtaining this consent can be straightforward or complex depending on the first charge lender. Some lenders routinely consent to second charges on development sites, while others have a blanket policy of refusal or require extensive information before considering the request.

When consent is given, it is typically formalised in a deed of priority or intercreditor agreement that sets out the respective rights of each lender. This document specifies which lender has priority over the proceeds if the property is sold, how the monitoring and drawdown process will work with two lenders involved, and what happens in the event of a default. Negotiating this intercreditor agreement can add two to four weeks to the timeline, as both sets of solicitors need to agree the terms. We begin the consent process as early as possible in the application to avoid this becoming a bottleneck.

Second charge lenders assess the total borrowing against the property, not just their own facility. If the first charge is £500,000 and the second charge is £800,000, the combined borrowing is £1,300,000. The lender will assess whether this combined amount is within acceptable parameters relative to the current value of the site and the projected GDV of the completed development. Most second charge development finance lenders will cap the combined first and second charge at 65-70% of GDV, which is the same ceiling as a first charge-only facility. The difference is that the second charge lender’s own recovery position is subordinated, which explains the rate premium. Full details of what lenders require are covered in our application checklist.

One of the most common applications of second charge development finance is releasing equity from land that has increased in value since acquisition. If you purchased a site for £300,000 with a £200,000 mortgage two years ago, and the site now has planning permission and is valued at £700,000, there is £500,000 of equity in the land. A second charge development finance facility can release a portion of this equity, alongside funding the construction costs, to reduce the amount of cash equity the developer needs to contribute.

The mechanics work as follows. The second charge lender values the site at its current value with planning permission, say £700,000. They assess the total scheme, including the GDV of the completed development and the total costs. If the GDV is £2,500,000 and the lender is comfortable with a combined first and second charge of 65% LTGDV, the total permissible borrowing is £1,625,000. With the first charge at £200,000, the second charge can be up to £1,425,000. If the total build costs are £1,200,000, the second charge covers all construction costs and releases approximately £225,000 of land equity as additional cash for the developer.

This equity release mechanism is particularly powerful for developers who have built a portfolio of sites with planning permission. Each site represents locked-up equity that can be unlocked through second charge development finance, potentially allowing the developer to fund construction on one site using equity released from another. We have worked with developers who have used this approach to fund two or three simultaneous projects, leveraging their land bank to maximum effect while retaining the original first charge mortgages that provide low-cost holding finance. For a deeper understanding of equity mechanics, see our guide on equity requirements for development finance.

Second charge development finance carries a rate premium over first charge facilities, reflecting the subordinated security position. In 2026, second charge rates typically range from 9% to 15% per annum, compared to 6.5% to 12% for equivalent first charge facilities. Arrangement fees are comparable at 1.5-2.5% of the facility, and monitoring surveyor costs are identical. The primary cost difference is therefore the interest rate premium, which typically adds £20,000 to £60,000 to the total finance cost on a £1,000,000 facility over twelve months.

To determine whether a second charge is cost-effective, you need to compare the total cost of the second charge structure against the total cost of refinancing into a single first charge facility. The second charge calculation includes the ongoing cost of the first charge plus the cost of the second charge. The refinancing calculation includes the early repayment charges on the first charge, the arrangement and legal fees for the new first charge facility, and the interest on the single facility at the first charge rate. In our experience, the second charge is cost-effective when early repayment charges on the first charge exceed approximately 1.5-2% of the balance, or when the first charge rate is significantly below current market development finance rates.

We prepare a detailed cost comparison for every client considering a second charge, modelling the month-by-month cash flow and total interest cost under both scenarios. This analysis accounts for the timing of drawdowns, the different interest rates on the first and second charges, all fees and costs, and the impact on the development appraisal’s bottom line. In most cases, one option is clearly more cost-effective than the other, and the analysis removes any ambiguity from the decision. Submit your project details through our deal room for a free cost comparison.

The most common practical issue with second charge development finance is obtaining first charge consent in a timely manner. Some first charge lenders take four to eight weeks to process consent requests, which can delay the entire development programme. To mitigate this, we recommend requesting consent from the first charge lender as soon as the decision to pursue a second charge structure is made, ideally before the formal development finance application is submitted. This allows the consent process to run in parallel with the finance application rather than sequentially, potentially saving several weeks.

Another consideration is the complexity of the drawdown process with two lenders involved. Each drawdown from the second charge facility may require the first charge lender to confirm that their facility is not in default, adding an administrative step to each drawdown request. Some intercreditor agreements also require the first charge lender to be notified of each drawdown and the updated combined borrowing position. These requirements are manageable but need to be built into the drawdown timeline, as they can add two to five days to each drawdown compared to a single lender facility.

Finally, consider the exit. Both the first and second charge must be repaid at the end of the development, whether through sales proceeds or refinance. The order of repayment is determined by the intercreditor agreement, with the first charge repaid before any surplus is applied to the second charge. If the completed development sells for less than expected, the second charge lender bears the shortfall risk, which is why they charge a premium. Ensure your development appraisal accounts for both charges being repaid in full, including all rolled-up interest and fees, before any profit is distributed to the developer. A scheme that generates enough to repay the first charge but not the second is not viable and will not be funded.