Development Finance for First-Time Developers

Property development finance is a short-term loan, usually 12 to 24 months, that pays for buying a site and building on it. The lender is secured against the land, normally with a first charge, and the loan is sized against both the total cost and the Gross Development Value (GDV): what the finished homes are worth once complete.

The land element is advanced at completion of the purchase. Build costs are then released in stages, each one after the lender's monitoring surveyor confirms the work done since the last drawdown. Interest is charged only on what has been drawn and is usually rolled up, so you make no monthly payments during the build.

The property development loan is repaid at the end from your exit strategy: selling the completed units, or refinancing onto development exit finance or buy-to-let mortgages if you are keeping them. Lenders want that exit to be credible before they sign, and for a first scheme they test it harder.

• A site with full planning permission, or one you are buying subject to it, as security for the development loan
• Land advance at purchase, then staged build drawdowns
• Interest rolled up and repaid with the loan
• Repayment from sales or a refinance once the scheme completes

Most lenders that take first-time developers cap senior debt at around 55-65% of GDV and 70-80% of costs, against 65-70% LTGDV for an established developer. Rates typically start around 8% p.a., with arrangement and exit fees on top, and the interest rate you are offered reflects your team as much as the site. The lower leverage means more of your own cash goes in.

On a £900k cost scheme you might need £180k to £270k of equity before interest and fees. Run your numbers through the equity required calculator before you offer on a site. If the cash is not there, a partner is usually a better answer than a weaker scheme, and private development funding from family or investors needs the same written terms as any other source.

Most first schemes are funded with a senior development loan plus your own cash, but there are different types of finance that can fill gaps or speed things up. Each layer adds cost, so use only what the scheme needs and make sure the margin can carry it.

If you need to buy before planning permission is granted, or move faster than a development lender can, a bridging loan can fund the site purchase. Bridging loans are then repaid by the development facility once consent and the build contract are in place. Where your equity is short, mezzanine finance or a joint venture partner can sit behind the senior debt.

• Senior development loan: the main facility, secured with a first charge, funding land and build
• Bridging finance: short-term funding to secure the site before planning or the development loan is ready
• Mezzanine finance: a second-charge loan that reduces your cash input, at higher rates
• Equity or joint venture: a partner who puts in cash or experience for a share of the profit

No lender expects a first-time developer to have built houses before. They want evidence you can manage money, people and a programme. Relevant experience comes in several forms, and you should present it plainly rather than stretch it.

Where your own record is thin, lenders look harder at your team. A main contractor with completed schemes of a similar size, an experienced project manager and an independent quantity surveyor can carry a first application.

• Work in construction trades, site management or contracting
• Refurbishments you have bought, managed and sold or refinanced
• Professional roles such as surveyor, architect, QS or engineer
• A landlord portfolio you have managed through works

For a first property developer, the safest development project is a small, plain scheme: two to four houses on a clean site with full planning, in an area with plenty of new-build sales evidence. Avoid basements, listed buildings and unusual construction until you have one scheme behind you.

Put a fixed-price JCT building contract in place with a contractor whose accounts and completed jobs you can show. Lenders favour fixed-price over cost-plus for first schemes because it caps your overspend risk. Our guide to first-time developer mistakes covers the errors that sink applications.

Most lenders will want you to borrow through a newly formed special purpose vehicle, a limited company that owns only this scheme. They will also ask for a personal guarantee from you as director, usually limited to a percentage of the loan, and will check your assets and liabilities.

If you lack the equity or the experience, a joint venture with an established developer can transform the terms. Lenders treat the partner's record as the scheme's record. You give up part of the profit, but you get the deal done. We can help find equity and JV partners.