What is senior debt in development finance?
Senior debt is the primary and most secure form of borrowing used in UK property development. It is called senior because it takes priority over all other forms of debt in the repayment hierarchy. The lender providing senior debt holds a first legal charge over the development site, meaning that if the borrower defaults and the property must be sold, the senior lender is repaid first, before any other creditor. This priority position is what makes senior debt the lowest-cost form of development borrowing, with rates currently ranging from 6.5% to 10% per annum depending on borrower profile and scheme risk.
In practical terms, senior debt funds the bulk of most development projects. A typical development finance facility will cover between 55% and 70% of total project costs, split between the land acquisition cost (or the value of land already owned) and the construction costs. The land element is usually drawn down on day one of the facility, while construction costs are released in stages as the build progresses. This phased approach means the developer only pays interest on funds actually drawn, which can significantly reduce the overall cost of borrowing over the project lifecycle.
We work with over 80 active senior development lenders in the UK market, ranging from high-street banks to specialist property finance houses. Each lender has different criteria regarding minimum and maximum loan sizes, geographic preferences, acceptable property types, and developer experience requirements. Understanding which lender is the best fit for your specific project is where broker expertise adds genuine value. A £1.5 million facility for a 4-unit scheme in Kent will be best served by a very different lender than a £25 million facility for a mixed-use development in central Manchester.
How senior debt is assessed and priced
Senior development lenders assess applications against three key metrics. The first is Loan-to-Gross-Development-Value (LTGDV), which expresses the total loan amount as a percentage of the completed scheme value. Most senior lenders cap LTGDV at 60-65%, though some specialist lenders will stretch to 70% for strong borrowers. On a scheme with a GDV of £6 million, a 65% LTGDV cap means the maximum senior facility would be £3.9 million.
The second metric is Loan-to-Cost (LTC), which measures the loan against total project costs rather than end value. Senior lenders typically fund up to 80-85% of total costs, with the developer contributing the remaining 15-20% as equity. The third metric, which is often the binding constraint, is the developer's minimum profit margin. Lenders want to see at least 18-20% profit on GDV for residential schemes. If your appraisal shows less than this, the lender may reduce their facility to create a larger equity buffer, even if the LTGDV and LTC ratios are within acceptable limits.
Pricing for senior development debt depends on a matrix of factors. The base rate environment sets the floor, and at the time of writing, Bank of England base rate sits at 4.5%. Fixed-rate senior facilities are currently priced from around 6.5% for institutional-quality borrowers with proven track records, rising to 10% or more for newer developers or complex schemes. In addition to the interest rate, borrowers should budget for an arrangement fee (typically 1-2% of the facility), valuation and monitoring surveyor costs, and legal fees. On a £3 million facility, these upfront costs typically total between £60,000 and £120,000.
First charge versus second charge: why it matters
The distinction between a first charge and a second charge is fundamental to understanding how senior debt operates. When a lender takes a first legal charge over a property, they are registered at the Land Registry as the primary secured creditor. No other party can claim priority over them in a sale or enforcement scenario. This first-charge position gives the senior lender maximum security, which is why they can offer the lowest interest rates in the capital stack.
If you introduce mezzanine finance into your structure, the mezzanine lender will take a second charge, ranking behind the senior lender. In the event of a forced sale, the senior lender is repaid in full before the mezzanine lender receives anything. This subordination is why mezzanine carries a significantly higher interest rate, typically 12-18% compared to senior debt at 6.5-10%. The mezzanine lender is compensated for accepting a riskier position in the capital stack.
In our experience, the interplay between first and second charge lenders is one of the most important and most overlooked aspects of deal structuring. Not all senior lenders will allow a second charge to be placed on the property, which means your choice of senior lender can determine whether you can incorporate mezzanine finance at all. We always confirm a senior lender's position on second charges before recommending them for a deal that may require additional layers of funding. Some lenders actively welcome mezzanine providers they have worked with before, while others refuse any second-charge debt on principle.
Key terms to negotiate in your senior facility
Beyond the headline interest rate, several terms in your senior debt facility can have a material impact on your project's financial outcome. The arrangement fee is the first to scrutinise. While 1-2% is standard, we have negotiated fees as low as 0.75% for repeat borrowers with strong schemes. On a £5 million facility, the difference between a 1% and 2% arrangement fee is £50,000, which comes directly from your profit.
The drawdown mechanics deserve careful attention. Some lenders require a minimum period between drawdown requests, typically 14-28 days. Others allow drawdowns on demand, subject to monitoring surveyor sign-off. If your build programme requires rapid mobilisation and frequent stage payments to subcontractors, a lender with a 28-day drawdown interval could create serious cash-flow problems. We always match the drawdown flexibility of the facility to the developer's programme requirements.
Interest calculation methodology is another area where terms vary. Most development lenders charge interest on a daily basis on drawn funds only, which is the most borrower-friendly approach. However, some facilities include a non-utilisation fee, typically 0.5-1%, charged on the undrawn balance of the facility. On a £4 million facility where only £1 million is drawn in the first three months, a 1% non-utilisation fee on the remaining £3 million adds £7,500 per quarter to your costs. These charges may appear minor but compound over a 12-18 month facility. For more on how capitalised interest affects your bottom line, read our guide on interest roll-up in development finance.
Finally, the exit fee or redemption structure is critical. Some lenders charge no exit fee, while others impose 1-2% of the original facility. More nuanced structures include a minimum interest period, meaning that even if you complete and sell quickly, you are liable for (say) six months of interest regardless. On a well-run project that completes ahead of schedule, a six-month minimum interest clause on a £3 million facility at 8% could cost an unnecessary £120,000. We always push for the most flexible exit terms available, and we recommend submitting your deal through our deal room so we can compare facility terms across our lender panel.
When senior debt alone is not enough
Senior debt alone is rarely sufficient to fund an entire development project. Even at 70% LTGDV, the developer must fund the remaining 30% from other sources. For a scheme with a GDV of £8 million, that remaining 30% equates to £2.4 million, which is a substantial equity requirement. This is where the broader capital stack becomes relevant.
Developers who lack the full equity requirement have several options. Mezzanine finance can cover a significant portion of the gap, typically lending up to 85-90% of total costs when combined with senior debt. Equity joint ventures allow developers to bring in a cash partner who contributes equity in exchange for a profit share. Some developers use bridging loans to acquire the site and then refinance into a development facility, using the planning uplift to reduce their effective equity contribution. Each of these approaches has trade-offs in terms of cost, complexity, and control.
In our experience, the most successful developers view the capital stack as a strategic tool rather than a simple funding mechanism. They match their capital structure to their business plan. Developers building for sale tend to favour pure debt structures with maximum senior leverage. Those building to hold long-term may accept a lower return in exchange for an equity partner who provides ongoing capital. The right answer depends on your objectives, your experience, and the specific characteristics of the scheme. For an overview of how these different funding sources can work together, see our guide on blended finance for development.
Choosing the right senior lender for your project
The UK development lending market is diverse and competitive, with lenders ranging from major banks like NatWest and Lloyds to specialist funds and challenger banks. Each occupies a distinct niche, and selecting the right lender for your project can save tens of thousands of pounds and months of time. A developer who approaches the wrong lender wastes time on an application that will be declined or receives terms that are not competitive for their situation.
For schemes below £2 million GDV, specialist development lenders and bridging houses often provide the most competitive terms. They are used to smaller projects, process applications quickly, and have more flexible criteria regarding developer experience. For schemes between £2 million and £10 million, a wider range of lenders competes actively, and this is where broker panel access delivers the most value. Above £10 million, bank-style lenders and institutional funds become relevant, offering lower rates but with more onerous reporting requirements and longer processing times.
Geographic preferences also play a role. Some lenders focus exclusively on Greater London and the South East, while others actively seek opportunities in the Midlands and the North where yields are higher. We have seen cases where moving from a London-focused lender to one with a strong regional appetite reduced the rate by 150 basis points on a development in Leeds, simply because the regional lender valued the location more positively. Understanding these nuances is why developers who work with experienced brokers consistently achieve better overall capital stack economics than those who approach lenders directly.