Residential Development Finance

A scheme of houses can usually be built and sold in phases. Lenders like that, because early sales start repaying the loan before the last plot is finished, which cuts rolled-up interest and the lender's exposure at the same time.

An apartment block cannot sell a single flat until the whole building is complete and signed off. Every pound of debt stays drawn to the end, so the term runs longer and the finance cost is higher. Expect lenders to look harder at the sales plan and to keep leverage nearer the lower end of the range.

Taller blocks add a further layer. Buildings of at least 18 metres or seven storeys with two or more homes fall under the Building Safety Regulator's gateway regime, and lenders will want the gateway approvals timetabled into your programme before they commit.

The same property development appraisal can attract very different offers depending on scale. Small schemes suit specialist lenders who are flexible on experience. Larger schemes open up lower pricing but bring tighter covenants and more due diligence.

Where senior debt leaves too large an equity gap, a second charge from a mezzanine lender can typically stretch total borrowing to 85-90% of GDV, at a higher blended cost.

• Single plots and schemes up to around 10 units: specialist and smaller lenders, more weight on your personal track record and the build contractor.
• Roughly 10 to 50 units: the widest choice of lenders, where a well-presented appraisal makes the biggest difference to pricing.
• 50 to 100+ units: phased facilities, lower margins for experienced developers, and closer scrutiny of sales rates, infrastructure costs and Section 106 obligations.

Both are forms of property development finance, and both are usually secured on the site with funds released in stages. The difference lies in how the lender sees the finished asset. Homes are valued from comparable sales and repaid as they sell. Commercial development finance is closer to commercial property lending. It funds offices, industrial units or retail, which are valued on their rent and the yield an investor would pay.

That makes residential property development projects easier to fund for most lenders. Commercial projects tend to need a pre-let or strong letting evidence, attract lower leverage and come from a smaller group of funders. Where a scheme combines the two, see our pages on mixed-use development finance and commercial development finance.

Few residential projects run on one loan from start to finish. Property developers often use two or three types of property finance in sequence, each priced for the risk at that stage. Knowing how they connect helps you plan the funding before you commit to a site.

The order below is common, though not every scheme needs every step. Our bridging loans and development exit finance pages explain the short-term options either side of the build.

• Site purchase without planning: bridging loans secured on the land's current value, typically for 6 to 18 months while you secure consent.
• Construction: a development loan that refinances any bridging and funds the build in stages, sized against GDV and total cost.
• Equity gap: mezzanine finance or an equity partner where senior debt does not stretch far enough.
• Unsold or retained homes at completion: development exit bridging to clear the build loan, then buy-to-let mortgages or a sale to repay it.

Every lender will ask how the loan is repaid. On most residential development projects the exit strategy is the sale of the finished homes, with a refinance as the fallback. If you plan to keep some units, show the buy-to-let mortgages or development exit finance you expect to use and the rent that supports them.

Interest is normally rolled up into the facility rather than paid monthly, which protects your cash flow during the build. It is still a real cost. Every month a programme overruns adds interest that comes out of your profit, so a realistic timetable matters as much as the headline rate.

To strengthen an application, show the lender you have tested the downside: a lower sales price, a slower sales rate and a cost overrun. Property development finance is easier to secure, and usually cheaper, when the appraisal still works under pressure.

Lenders price uncertainty, whether your project is a single plot or a multi-million pound scheme. The more of the pack below you can show on day one, the fewer caveats in your indicative terms and the faster you reach credit approval. Run your numbers through our development appraisal calculator first so the headline figures hold up.

When you are ready, send the pack through our deal room. We put it in front of the lenders whose appetite fits the scheme, rather than circulating it to the whole market.

• Planning decision notice, with a note of which pre-commencement conditions are discharged.
• Section 106 agreement and CIL liability notice, if any.
• A costed build budget, ideally a fixed-price contract or a quantity surveyor's cost plan.
• Comparable new-build sales evidence for each unit type.
• Build programme, professional team and your development CV.
• Structural warranty provider confirmed for every unit.