A development lender is funding something that does not exist yet. There is no rental income to test and no finished building to value, only a plan, a budget and a person who says they can deliver it. Which is what makes the questions harder than on a standard commercial mortgage.
This page sets out the development finance requirements UK lenders look at, from the developer’s record to the exit, with a worked example of the numbers they run. It also covers why applications get declined and how to present yours.
Thinking about development finance for your project? Speak to a specialist before you apply.
What Development Finance Is
Development finance is a short-term loan that funds a build or major conversion, usually released in stages as the work progresses. It differs from a mortgage because the lender is lending against a project and not a finished asset. Interest is often rolled up and paid when the loan is repaid, and repayment normally comes from selling the units or refinancing onto longer term finance.
For a full description of the product, see our development finance service page. This page deals with something narrower, which is how the lender decides whether to say yes.
How Lenders Assess a Development Finance Application
Lenders look at three things in turn: the developer, the scheme and the exit. A weakness in one can sometimes be offset by strength in another. A gap in all three usually ends the conversation.
| What the lender checks | What they want to see |
|---|---|
| Developer’s experience | Completed schemes of a similar size and type, with sales or refinance evidence |
| Gross development value (GDV) | A valuation supported by comparable sales for the finished units |
| Loan-to-cost and loan-to-GDV | Your own money in the scheme and a loan that sits well inside both limits |
| Planning | Permission granted, conditions understood and any pre-commencement conditions cleared |
| Build costs | A costed schedule, ideally checked by a quantity surveyor, with a contingency |
| The exit | A realistic sale or refinance route that still works if prices or timing move |
| Professional team | Architect, contractor and project manager with relevant track records |
The Developer
Experience carries the most weight. A lender wants to see that you have delivered a comparable scheme before. A developer who has built four houses will find it easier to borrow for ten than one who has only refurbished flats. You can show this with completion certificates, sales particulars, a development CV and photographs.
A first-time developer can still borrow. The usual route is a smaller scheme, a lower loan-to-cost and a visible professional team. An experienced contractor or project manager on the team helps. Some lenders also ask for a personal guarantee from the directors.
Your own finances matter alongside the project. The lender will look at your assets and liabilities, your credit record and any other borrowing, because it needs to know that a delay will not leave you unable to meet your commitments. Many lenders also want to see that you can fund your share of the costs without borrowing it elsewhere.
The Scheme
GDV is the value of the finished project. The lender will commission its own valuation, and it will use that figure and not yours. Comparable sales for similar units close to the site carry the most weight. An optimistic GDV is one of the quickest ways to lose a lender’s confidence.
Two ratios control how much you can borrow. Loan-to-GDV compares the loan with the finished value. Loan-to-cost compares it with the total cost of the scheme. Lenders vary, and the figures move with the type of scheme, the strength of the developer and the amount of security available. Senior debt is commonly sized in the region of 60% to 65% of GDV and up to around 70% of costs, while mezzanine or stretch finance can lift total borrowing above that at a higher price. You can try your own figures in our development finance calculator.
Planning permission is normally in place before a lender releases funds for the build. Some lenders will fund a site purchase without it, but on lower leverage and with higher pricing. The loan is usually short term while permission is sought.
The lender will want a detailed cost schedule. Most appoint a monitoring surveyor, paid for by the borrower, who reviews the budget and programme before completion and inspects the site before each drawdown. A contingency of around 5% to 10% of build costs shows the budget can absorb overruns.
The Exit
The exit is how the loan gets repaid. The two usual routes are selling the completed units and refinancing onto a term loan, such as a commercial mortgage or buy-to-let mortgage, when you intend to hold the building.
Lenders stress the exit. For a sale, they ask what happens if prices fall by 10% or sales take six months longer than planned. For a refinance, they check that the finished property would meet a lender’s income and loan-to-value tests on the day the development loan ends. A plan that only works if everything goes right will not pass.
How Funds Are Drawn
Development finance is not paid out in one lump. The lender normally releases the land purchase funds first, then pays for the build in stages, after the monitoring surveyor has confirmed the work completed and the cost to complete. Your own contribution usually goes in first.
Interest is generally added to the loan and paid on exit, which leaves monthly outgoings clear while the build runs, though the cost grows the longer the project takes. Budget for the other charges as well: an arrangement fee, valuation and legal fees, the monitoring surveyor’s fees and, with some lenders, an exit fee.
A Worked Example
Take a scheme with a gross development value of £2,000,000. Buying the site costs £550,000 and the build costs £800,000. Professional fees and a contingency allowance add £120,000, and interest and selling costs add another £130,000. Everything together comes to £1,600,000.
That leaves a profit of £400,000, which is a quarter on spend and a fifth of the finished value. Lenders look for margins of this sort. Say the lender caps its loan at 65% of GDV and 70% of cost. The GDV test allows £1,300,000 while the cost test allows £1,120,000. The lower figure wins. The loan is £1,120,000, and the developer puts in the remaining £480,000.
These figures are illustrative and your own terms will differ. The point is that the cost limit, and not the GDV limit, often decides how much you can borrow. To test a scheme of your own, use the development finance calculator tool.
Why Applications Get Declined
Most refusals come down to a short list of problems:
- The developer has no comparable track record and no experienced team
- Planning is missing, conditional or at risk of challenge
- The GDV is not supported by recent local sales
- The budget has no contingency or looks too low for the specification
- The exit rests on one buyer, or on a refinance that would not pass
- The borrower has too little of their own money in the deal
Most of these can be fixed before applying. Talk to a broker early, and the scheme can be restructured, the team strengthened or the right lender chosen before a decline appears on your credit file.
How a Broker Helps With Development Finance
Development lenders differ in the schemes they back, the leverage they offer, the experience they require and the speed they work to. Some will fund a first-time developer, and others will not look at one. A broker who deals with these lenders regularly can steer your scheme towards suitable lenders, prepare the package they expect and compare the full cost of each offer, including fees and exit charges.
If the senior loan does not cover enough of the costs, a broker can also arrange mezzanine finance behind it. For a short-term site purchase or a refurbishment, bridging finance may fit better.
Frequently Asked Questions
What do development finance lenders look for?
Lenders look at the developer’s experience, the scheme’s costs and gross development value, planning status, the quality of the professional team and a realistic exit. They also check your own finances and how much of your money is in the project.
How much can I borrow for a property development?
It depends on the lender and the scheme. Senior development loans are commonly sized at around 60% to 65% of GDV and up to about 70% of costs, with mezzanine finance able to lift total borrowing higher at a greater cost.
Can a first-time developer get development finance?
Yes, with some lenders. A smaller scheme, a lower loan-to-cost and an experienced contractor or project manager improve your chances. Many lenders want to see more of your own money in the deal.
Do I need planning permission before I apply?
Most lenders want planning permission in place before they release funds for the build. A few will fund a site purchase without it, usually on lower leverage and for a short term.
What is a monitoring surveyor?
A monitoring surveyor is an independent professional the lender appoints, at the borrower’s cost, to review the budget and programme and inspect the site before each drawdown.
How is development finance repaid?
The loan is repaid when the units are sold or the property is refinanced onto a longer term loan. Interest is often rolled up and settled at the same time.
What is the difference between loan-to-cost and loan-to-GDV?
Loan-to-cost compares the loan with the total cost of the project, and loan-to-GDV compares it with the finished value. Lenders apply both limits, and the lower figure sets the loan.
Speak to a Specialist
Speak to a specialist commercial finance broker before you apply.
Commercial Finance Network is directly authorised and regulated by the Financial Conduct Authority. Development finance and other business finance is not regulated by the Financial Conduct Authority. Your property may be repossessed if you do not keep up repayments on a loan secured against it.
Call us on 03303 112 646 / 01494 622 111 or email info@cfnuk.com to discuss development finance for your project.
Related Pages
- Development Finance – our development finance service for builds, conversions and refurbishments.
- Bridging Loans – fast, short-term finance for site purchases and time-pressured deals.
- What Is Mezzanine Financing? – top-up funding behind a senior development loan.
- Development Exit Loans – refinancing a completed scheme while units are sold.
- Self-Build Mortgages – staged funding for building your own home.
- Commercial Mortgages – long-term finance once a scheme is complete and let.
