The True Cost of Development Finance: A Complete Fee Breakdown

When developers compare development finance offers, they naturally focus on the interest rate. A lender quoting 7.5% sounds cheaper than one quoting 8.5%, and in many cases the developer will choose the lower rate without looking further. However, the headline interest rate is just one component of the total cost of borrowing, and in some cases it accounts for less than 50% of the total finance bill. The true cost of development finance includes arrangement fees, exit fees, broker fees, valuation fees, legal fees, monitoring surveyor fees, insurance costs, and a range of other charges that can collectively exceed the interest cost itself.

To illustrate the point, consider two lenders offering facilities on a £2,500,000 scheme with a 15-month build programme. Lender A quotes 7.5% interest with a 2% arrangement fee, 1% exit fee, and higher monitoring and legal costs. Lender B quotes 8.5% interest with a 1% arrangement fee, no exit fee, and more moderate ancillary costs. When all fees are modelled over the facility term, Lender B may prove cheaper despite the higher headline rate. We see this scenario regularly in our practice, and it underscores the importance of comparing total cost of finance rather than headline rates.

This guide brings together all the individual fee categories we have covered in our hidden fees series and presents them as a complete framework for calculating the true cost of development finance. Whether you are a first-time developer or an experienced operator, this framework will help you make better-informed borrowing decisions and protect your profit margin.

The total cost of a development finance facility comprises the following categories. Interest is the primary cost, typically 6.5% to 12% per annum depending on the borrower's experience, the scheme quality, and market conditions. Interest is usually rolled up and compounded monthly, meaning you do not make payments during the build but the interest accrues and is repaid along with the principal at exit. On a £2,000,000 average drawn balance over 15 months at 8.5%, the total interest cost is approximately £212,500.

Arrangement fees typically range from 1% to 2% of the gross facility. On a £2,500,000 facility at 1.5%, the arrangement fee is £37,500. Exit fees, where applicable, add 0.5% to 1.5%, potentially £12,500 to £37,500 on the same facility. Broker fees of 1% add £25,000. Valuation fees of £4,000 to £8,000. Legal fees for both sides combined at £10,000 to £20,000. Monitoring surveyor fees of £8,000 to £15,000. Insurance premiums of £5,000 to £15,000. QS fees of £3,000 to £6,000 if required.

Summing these charges on a representative £2,500,000 facility with a 15-month term produces a total cost range of approximately £318,000 to £376,000. Expressed as a percentage of the facility amount, the total cost of finance is 12.7% to 15% of the gross facility, or 8.5% to 10% annualised. This is significantly higher than the headline interest rate of 8.5% and demonstrates why focusing solely on the interest rate gives a misleading picture of your borrowing costs.

Let us work through a specific example to demonstrate how the true cost is calculated. Consider a 12-unit residential development in Kent with a GDV of £4,200,000, a land cost of £1,200,000, build costs of £1,800,000, and a target profit of £600,000 (14.3% on GDV). The developer requires a facility of £2,700,000 comprising £1,080,000 for land (90% LTV on land) and £1,620,000 for construction (90% of build costs). The build programme is 14 months with a three-month sales period.

The finance costs on this scheme, using mid-range assumptions, would be: interest at 8.5% on an average drawn balance of £1,800,000 over 17 months, equating to approximately £217,000 in rolled-up interest; arrangement fee of 1.5% on £2,700,000 equating to £40,500; no exit fee (lender selected accordingly); broker fee of 1% equating to £27,000; valuation fee of £5,500; combined legal fees of £14,000; monitoring surveyor fees of £12,600 (14 visits at £900); insurance premiums of £8,500; QS report of £4,000; and building control fees of £6,000.

The total finance and associated costs amount to £335,100. When we add this to the land cost of £1,200,000, build costs of £1,800,000, professional fees of £85,000, and Section 106 and CIL costs of £45,000, the total development cost is £3,465,100. The projected profit is therefore £734,900 (GDV of £4,200,000 minus total costs of £3,465,100), representing a profit margin of 17.5% on GDV. Without the detailed finance cost modelling, a developer using a simple interest rate assumption might have projected a significantly higher profit and only discovered the reality when the final account was settled.

To compare offers fairly, you need to calculate the total cost of finance for each lender using the same scheme assumptions. Create a spreadsheet or use development appraisal software that models the following for each offer: rolled-up interest over the full facility term using the actual drawdown profile, arrangement fee (check whether it is on gross facility or net advance), exit fee (check calculation basis), non-utilisation fee if applicable, monitoring surveyor fees (estimate number of visits and cost per visit), valuation fee, legal fees (ask for estimates from each lender's panel solicitors), and any other fees disclosed in the term sheet.

Sum these costs for each lender to produce a total cost of finance figure. Then express this as an annualised percentage of the average drawn balance to create a comparable metric. This annualised total cost, sometimes called the all-in cost of finance, is the most meaningful figure for comparing offers. A lender with a 7.5% interest rate but high ancillary fees might have an all-in cost of 12%, while a lender with an 8.5% interest rate and minimal fees might have an all-in cost of 11%. The second lender is cheaper despite the higher headline rate.

When you submit your project through our deal room, we prepare this analysis for you as standard. Our funding recommendation includes a total cost of finance calculation for each lender on our shortlist, using your actual scheme parameters. This removes the guesswork and ensures you are comparing like with like. We have consistently found that the cheapest headline rate is not the cheapest overall cost, which is why our total cost approach delivers better outcomes for our clients than rate-shopping alone.

Beyond the main fee categories, there are several additional costs that developers frequently overlook. Drawdown administration fees of £150 to £500 per drawdown can add £1,000 to £3,000 over a typical project with six to eight drawdowns. CHAPS payment fees of £25 to £35 per transfer are modest individually but accumulate over multiple transactions. Facility amendment fees, charged if you need to vary any aspect of the facility agreement, typically range from £1,000 to £3,000 per amendment plus legal costs.

Title indemnity insurance premiums of £500 to £5,000 may be required if the title has any defects. Partial release fees of £250 to £750 per unit, plus legal costs, are charged when individual units are released from the lender's security for sale. On a 12-unit scheme, partial release fees could total £5,000 to £12,000 including legal costs. Non-utilisation fees and extension fees add further costs if applicable.

When all these micro-costs are aggregated, they can add £10,000 to £25,000 to the total finance bill. This is money that comes directly from your profit margin, and every pound saved on fees is a pound of additional profit. The disciplined approach is to model every cost, however small, in your development appraisal so that your projected profit is realistic and achievable. We have built comprehensive cost models that capture every fee and charge, which is one reason why the schemes we fund consistently deliver the projected returns.

The most effective way to reduce the total cost of finance is to work with an experienced broker who understands the complete fee landscape and can negotiate across all cost categories simultaneously. Individual fee negotiations, such as asking for a lower interest rate, are less effective than a holistic approach that considers the trade-offs between different charges. For example, accepting a marginally higher interest rate in exchange for no exit fee and a lower arrangement fee often produces a lower total cost.

Speed of execution also affects total cost. Every week of delay in the legal process, the valuation, or the conditions precedent sign-off adds interest cost to your facility. If your development loan is drawn a month later than planned because of slow legal work, the additional interest on a £1,500,000 land advance at 8.5% is approximately £10,625. Working with experienced professionals who can move quickly, from solicitors who specialise in development finance to valuers who understand the lender's requirements, reduces the total time from application to drawdown and saves money.

Finally, build your track record. The single biggest driver of finance cost is the developer's experience. Experienced developers with a history of successful completions access lower interest rates, lower arrangement fees, fewer ancillary charges, and more flexible terms than first-time developers. Every scheme you complete successfully is an investment in lower finance costs on your future projects. If you are just starting out, our guide on development finance for first-time developers provides detailed guidance on building your track record efficiently. For developers at any stage of their journey, submit your next project through our deal room and we will show you the true cost of finance across multiple lender options.

Understanding the true cost of development finance is the foundation of profitable property development. The guides in this series have covered every major fee category in detail, from arrangement fees and monitoring surveyor costs to Section 106 and CIL obligations. Armed with this knowledge, you are better equipped to evaluate finance offers, negotiate terms, and protect your profit margin.

However, knowledge alone is not enough. You need someone who applies this knowledge on your behalf, who negotiates with lenders daily, and who has the relationships and market intelligence to secure terms that reflect the true competitive landscape. That is what we provide. Our team has arranged over £500 million of development finance across every region of the UK, from Greater London to Edinburgh, and we bring this experience to bear on every transaction.

Whether you have a specific project that needs funding or you want to understand what finance is available for a scheme you are considering, we are here to help. Submit your project details through our deal room and you will receive a comprehensive funding assessment that includes the true cost of finance from multiple lenders, analysed on the framework described in this guide. There is no cost and no obligation. Let us show you what your development finance should really cost.