Development Loans

Property Development Finance

development loans

Battersea Power Station is to be converted into 800 homes.

This is finance for the development of residential properties. If you are looking to build a residential home for yourself, check the self build section. Property development embodies small scale schemes like buying a property to refurbish and significantly enhance its value and then sell on for maximum gain, to large ground up schemes where you buy land with planning permission to build a residential dwelling of some sort (flats, houses) and then sell on for maximum gain.


3 Key Principles of Development Finance

Development finance is a short term loan. The term of the loan is based on how long you have anticipated your development project will take and the onus is on you to advise the lender accordingly. As such, you must factor for potential delays when deciding on the term of the loan to ensure you repay the loan by the agreed time. If you don’t pay back the loan in the agreed time, you will incur late penalty charges which will eat into your profit.

You must have a clearly defined exit strategy from the outset, which is your defined method of repaying back the development loan at the end of the term. The typical exits are sale of the property or refinance to pay off the development loan.

Determine the Gross Development Value (GDV) of the development, i.e., the estimated market end value of the property/development once the works has been completed.

Lets now expand on these three principles with the following example:

You wish to purchase a property at auction for £300,000. The property is not currently habitable; it has no kitchen, bathroom, no central heating, and requires a complete electrical overhaul. The property has planning permission for a side extension. Your builder has estimated it will take approximately five to six months to complete the works, at a cost of £90,000.

An estate agent has confirmed that the value of the property on completion will be £600,000 and is confident of a quick sale within three months of completion. You estimate it will take 10 months to complete the build and sell. Your exit strategy is the sale of the property.

You approach a broker for a development loan: Lender red agrees to lend you up to 65% of the purchase price and maximum 60% of GDV. As such, you will get £195,000 on day one to enable you to buy the property and you will be required to put down a deposit of £105,000 (35%).

The GDV is £600,000 and lender red has agreed to lend up to 60% of GDV = £600,000 x 60% = £360,000. So technically, lender red could lend you the initial £195,000 to buy the property and a further £165,000 for the development work: £195,000 + £165,000 = £360,000. But you don’t actually need £165,000, just £90,000.

Lender red will then release £90,000 (possibly in stage payments) for you to complete your refurbishment and side extension. Total loan: £195,000 + £90,000 = £285,000. Stage payments: they may divide the £90,000 into three parts of £30,000 over a period of 3/4 months on hitting key phases of the build, or they could release the entire £90,000 immediately.

Lender red fees are as follows: an interest rate of 8% over 10 months with 2% arrangement fees added to the loan. Interest is rolled up into the loan, so no monthly interest payments are made during the build. There is a 1.5% exit fee on GDV.

Let’s do the numbers:

Sell strategy

£285,000 x 2% lenders arrangement fees = £5700 (added to loan)

Banks charge an arrangement fee for setting up the development loan.

£285,000 + £5700 = £290,700

10 months rolled up interest is 8% / 12 months = 0.66% x £290,700 = £1919 per month x 10 months = £19,186.

Rolled up interest is where the bank calculates the total interest for the term of the loan and adds it to the principal. As such, you make no monthly payment during the development phase and make one lump sum payment at the end, which includes the principal plus 10 months interest. Of course you have the option to pay the interest monthly.

£290,700 + £19,186 = £309,886

Total development loan: £309,886 (52% LTV)

The loan, arrangement fees, and interest roll up must not exceed 60% of GDV. As you can see, the entire loan of £309,886 on GDV of £600,000 is 52%.

The development is completed in seven months and it takes three months to complete the sale. The property is sold for £600,000 and the development loan is repaid.

£309,886 plus 1.5% exit fee (i.e., 1.5% of GDV)

GDV is £600,000 x 1.5% = £9000 exit fee + £309,886  = £318,886 has to be repaid to lender red.

The property is sold for £600,000 and your solicitor sends £318,886 to redeem the loan with lender red and remits the balance of £281,114 into your account. (£600,000 – £318,886 = £281,114).

You make £281,114 (before taxes).

What is the Return on Investment (ROI)?

ROI is gain on cost, i.e., £281,114 / £318,886 = 88.15%.

Developers generally work on an ROI of 25% to 30% of cost. To get 88% is remarkable. But just focus on the financing principles for now. If you grasp the principles, then you’re half way to becoming a property developer.

Refinance/Remortgage strategy

Alternatively, it’s your strategy not to sell the property but to keep it as an investment to generate income and capital appreciation. Therefore, your exit strategy is to refinance/remortgage onto a BTL mortgage. Existing development loan is £318,886 (53% LTV).

A local lettings agent confirms rental income of £2000 per month.

You approach a broker to obtain a BTL mortgage for £318,886 (existing development loan) on property value of £600,000. (53% LTV). Your broker arranges a BTL mortgage with lender blue, a 5 year fixed rate at 3.65%.

Monthly mortgage cost for mortgage of £318,886 on interest only is £943 pm.

You complete the application form at least two weeks before the property is completed. Your broker arranges for the property to be valued on completion day. Lender blue instructs a surveyor, who confirms the value of the property at £600,000 and rental income of £2000 per month.

As survey report confirms valuation and rental income is sufficient to support the mortgage, lender blue approves a BTL mortgage of £318,886. Lender blue sends £318,886 to your solicitor, who transfers the money to lender red to pay off the development loan.

Lender blue now has a charge on the property and you have a mortgage with lender blue of £318,886. Mortgage is on interest only over a term of 20 years.

Rental income: £2000 – £943 mortgage cost = £1057 positive net cash flow with existing equity of £600,000 – £318,886 = £281,114.

Once you grasp these basic sell/refinance principles, you’re ready to commence your career as a property developer.

Bespoke Development Finance

This is how the vast majority of development loans are structured and redeemed. There are a few variances to this financing model, e.g., some lenders will request a larger deposit at the outset and will advance a higher percentage of the build cost: 55% of purchase price and 90% of cost. It’s possible to obtain 100% of purchase price if you have other properties / assets. The rates between lenders differ considerably and some lenders are restricted in what and where they will lend.

There are so many ways to structure a development deal and it goes without saying that you need to speak to a specialist commercial mortgage broker whose job is to ascertain the most cost effective route to obtaining the funds for your development project.

The above example is based on a rate of 8% pa. Some of you may be thinking that is this is expensive, but you cannot compare development finance to standard residential mortgages where you can get a tracker at 1.79% over base. It’s not a like for like comparison so banish that mindset immediately. They are two distinct animals with different levels of risk and this is reflected in the pricing.

Property developing is a serious business and lenders generally only lend to experienced players who understand the development game. Project delays and unforeseen additional expenses may jump out and swallow your budget. The risks are high but if you get it right so are the rewards.

In 1995, two brothers borrowed £6000 from their grandmother to renovate their flat, valued at £122,000 andDevelopment Finance sold 18 months later for £172,000. In 2005, they commenced construction of London’s premier address, One Hyde Park, buying it for £150m, and converted it into 86 of the most expensive properties (per square foot) in British history. A one bedroom flat (1,571 square feet) recently went on the market for just under £10m. That’s a defying gravity 6,365 per square feet!  If you have a knack for property development, then follow your passion, but successful developers get a full grasp of the finance first and adopt a lateral thinking approach to raising money thereafter.

There could be cheaper alternatives; for example, raising the money from existing properties, or perhaps taking out a secured loan. It boils down to how much you are looking to borrow and what you’re proposing to build. There is more than one way to raise funds and it’s best explored first and foremost by sitting down with an expert to go through all the options. Because there is a potential to structure the deal differently and access cash from different lending channels, rates can vary significantly, from 5% pa to 18% pa. In some cases, you may not need to borrow.

Our development loan team comprises specialist mortgage brokers from the top UK mortgage firms. They have been specifically chosen for their experience and expertise in arranging development finance. Some of our brokers only arrange commercial mortgages and as a result, they are incredibly knowledgeable on the different financing options available that could be tailored to suit your specific development.

Please note that not all mortgage brokers have experience in arranging development loans. This is an incredibly niche area so make sure you deal with a broker that arranges commercial loans on a regular basis, e.g., ask them how many development deals they have arranged and completed in the last 12 months.

Lack of development experience

Supposing you have a development opportunity but you lack the means and resources to maximise the opportunity…provided the deal stacks up, then you can partner with an experienced developer and agree on a profit share. Read the post: How to become a building society. It explains how a joint venture could be structured and financed.

If you’re still unsure about how to proceed with a potential development opportunity, e.g., planning potential, architectural drawings, sourcing experienced builders, building costs or whether the deal stack up, then feel free to email us and we will put you in touch with a developer:


Last three months bank statements

Last three months payslips or last three years trading accounts if self employed

If you are an experienced developer: summary of projects to date

Development Appraisal: purchase price, land value, cost of construction, fees, duration of build, contingencies, GDV, exit strategy, comparables

If you have no experience: CV and bios of your project team —- architect, builders, etc and works they have done to date.



The Financial Conduct Authority does not regulate most types of buy to let mortgages, bridging loans, development loans and commercial loans.




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