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This guide explains how property development finance works, the types of funding available, and how to choose the right option for your project.
Key Features of Property Development Finance
Purpose: Short-term loans to “bridge the gap” until long-term financing is secured or the property is sold.
Purpose: Medium-term loans designed for larger-scale projects, including ground-up developments and conversions.
Features: Risk is shared between parties, but profits are divided.
Loan-to-Cost (LTC): The percentage of the project’s total cost that the lender will fund (typically 70-80%).
Loan-to-Value (LTV): The percentage of the property’s Gross Development Value (GDV) covered by the loan (typically 60-75%).
Staged Payments
Funds are released in tranches based on project milestones, such as completing the foundation or installing the roof.
Benefit: Reduces borrowing costs by aligning funding with project progress.
Lenders require a clear exit strategy, such as selling the property or refinancing onto a long-term loan, to ensure repayment.
Access to Capital: Enables developers to take on larger or multiple projects without tying up personal funds.
Flexibility: Offers tailored solutions for a variety of development needs, from light refurbishments to large-scale builds.
Stage Payments Reduce Risk: Staged payments ensure that funds are only released as the project progresses, reducing the risk for both developers and lenders.
Compared to traditional finance, development finance is designed for speed, allowing developers to act quickly on opportunities.
Higher Costs: Interest rates and fees for development finance are typically higher than standard mortgages due to the higher risk involved.
Strict Criteria: Lenders may require a detailed business plan, strong exit strategy, and proof of experience in similar projects.
Market Dependence: The success of the project often depends on market conditions, which can impact the ability to sell or refinance the property.
Situation: A developer purchases a 2-bedroom house at auction for £150,000 and spends £30,000 on upgrades to sell for £220,000.
Solution: A £120,000 bridging loan is used to fund the purchase and refurbishment, and it is repayed upon sale.
Scenario 2: Ground-Up Development
Situation: A developer acquires a plot of land for £200,000, intending to build three residential units with a GDV of £900,000.
Solution: Secures £600,000 in development finance, with funds released in stages as construction progresses. Repayment is made through the sale of the units.
Present a Strong Business Plan: Include detailed costings, timelines, and projected profits to demonstrate the project’s viability.
Focus on the Exit Strategy: Lenders need to know how you plan to repay the loan, whether through sales or refinancing.
Work with a Specialist Broker: A broker with experience in development finance can connect you with the right lenders and negotiate competitive terms.
Be Prepared for Valuations: Lenders will require an independent valuation of the property and the proposed development’s GDV.
Disclaimer
Auction Finance provides mortgage advice only and is not authorised to offer financial or legal advice. Please consult a qualified financial advisor for guidance specific to your project.
Yes, but lenders may require strong business plans and additional guarantees to mitigate risk.
Approval and funding can take 2-4 weeks, depending on the complexity of the project.
Rates typically range from 0.5% to 1.5% per month, depending on the lender and project risk.
Most lenders require developers to contribute a percentage of the total project cost, usually 20-30%.
(C) 2025 Auction Finance is a trading name of Mortgage Knight Ltd