Development Finance
Feel free to play around with our custom built development finance calculator to see if the numbers work for you and if so, please submit an enquiry using the enquiry form below. We have an FAQ section at the bottom of this page.
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Development finance is used mainly for ground up developments or developments to a property when there is a large amount of work to a structure which is already there, an old church or pub being turned into 8 flats, for example.
Development Finance is structured in a similar way to bridging finance, where you will usually borrow an amount from the lender, the interest charged will be applied to your balance and you will redeem a higher figure when you repay the loan.
Development finance will usually have 2 different loan parts running simultaneously, your initial borrowing or 'day 1 loan' and also your drawdown facility or 'works loan'.
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Your day 1 loan or initial borrowing is how much money you are borrowing against the site itself, this works in a similar way to a bridging loan. The lender will lend up to a certain loan to value % (LTV), lets say 60% for example, so they will calculate 60% of the value of the site, work out how much room they need to make for fees and interest for the term of the loan and they will release you what is left over. This means that by 'borrowing' 60%, you wont actually receive 60%, you are borrowing 60% GROSS but this will NET down to a smaller % in your hand. If you redeem the loan before the end of the term, your loan wont actually reach 60% and you wont be charged that interest.
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The drawdown facility or works money works slightly differently. The lender will look to fully fund all works on a project, to ensure that the work is covered if the borrower couldn't complete the build for some reason. What this means is that the lender will calculate the day 1 loan (60% using the example above) plus all of the works money, with fees and interest and this will arrive you at your 'GROSS LOAN'.
For a lender, this gross loan needs to fit the loan to gross development value % (LTGDV). Your LTGDV is the percentage that your loan is of the value of the property/properties once all works are completed, in other words, your end value.
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Development Finance would be impossible to source yourself and juggle multiple lenders to get quotes, so it is always best to use a broker.
UK's Best Development Finance Calculator
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Lender Fee (2%)
LTV% Day 1
LTGDV %
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Development Finance Rate Guide
Development Finance is usually a slight bit more expensive than bridging finance. The difference between the two is usually down to either the cost or level of works, but other than that they are essentially the same. Both forms of finance are short term, however bridging is usually less 'heavy'. Development finance is a little tricky to provide a guide with as often lenders compete for business. This means in practice a lender may quote one rate to a broker or client, then the broker may be offered better elsewhere, so in order to not lose the deal, the original lender may lower their rate or remove some fees. A good broker will negotiate these rates for you from the outset and will only present a lenders final numbers after all negotiations.
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Lenders in this space will also often offer bespoke rates and products as every development is slightly different and therefore the risk for the lender differs from one deal to the next. For a 'vanilla' development, a lender may offer as low as 0.8% per month, whereas for a much larger and more complex development, a development finance lender may go as high as 1.5% per month.
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For inputs into the calculator above, please assume most developments fall within the 0.9%-1.2% range per month, as anything outside of this would be considered an outlier.
Development Finance FAQs
What is 'development finance'?
Development finance, much like bridging loans, are a form of short term finance, which is used to 'bridge the gap' between two time periods, with the second period being a repayment or 'exit' strategy of the loan. The difference between development finance and bridging though is that development finance is focused on properties that need either a heavy amount of works or 'developing'. Usually with development finance, you will have a site value on day 1, a cost of proposed works and a GDV and all of the other numbers come off of these 3 key factors.
Do I need a good credit rating to get development finance?
Not necessarily, no. Development Finance, much like bridging, is assessed on the 'exit strategy', which is a finance-y way of saying 'how is the loan going to be paid off'. Development finance lenders work on loan to value on day 1 and loan to gross development value (LTGDV) at the end of the loan term. As long as the exit strategy can pay off the gross loan and this gross loan is within the lenders maximum LTGDV percentage, then the lender will be happy to grant you the loan.
How much does development finance cost per month?
This ones a great question, but its often a little misplaced. It's only natural to think about property finance like a mortgage, with monthly payments coming out, making you think about your mortgage as X amount per month. With development finance you will most likely take rolled or retained interest, which means you wont have a monthly payment coming out of your bank account. Secondly, most lenders charge their interest daily meaning, unless you are guaranteed to pay this loan off in an exact amount of months, you are going to owe the lender the initial loan, the fees and then X amount of days worth of interest on top of this figure. With some lenders this interest may compound, with some lenders it may not.
Are there any early repayment charges with development loans?
This ones a little bit tricky to answer as it depends on the product, but generally speaking lenders may have a minimum interest period of 3 months. Unlike a traditionally mortgage, you will not be penalised if you settle the loan before the end of the product, in fact it will mean you save money and it is in your interest to do so.
What is a net loan and what is a gross loan?
As said above, development finance is usually taken on retained or rolled interest, meaning that there are no monthly payments for the borrower. The lender will place a charge on the land/property for the percentage of the property value they are lending you, for example, if you are borrowing 50% against land valued at £100k, the lender will place a charge on the land for £50,000.
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This figure is known as your gross day 1 loan and it is what you would owe back to the lender at the END of your development loan term but only for the portion of the loan borrowed against the asset. Your net loan is the amount you actually receive on day 1, which is lower. The lender (or a good broker) run a calculation to find out what figure would grow into the £50,000 once interest and fees have been added to it. Lets say for round numbers that a £45k loan would carry £1k in fees and £4k in interest over the term of the loan, in this example £45k is your net loan and this is the amount that you receive on completion, most often used towards the purchase of the asset.
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The other part of your loan in development finance is your works facility, which will cover the cost of the works for you, as a net loan. The gross loan for this portion is the cost of works plus the fees and interest associated with this portion of the loan only. For example if the works are to cost you £100k and this carries £3k in fees and £7k in interest, your gross loan here would be £110k and your total gross loan would be £160k, using the land loan in the paragraph above.