Comprehensive guide to development finance for commercial and residential projects

Development finance is specialist, short-term borrowing used to fund property development projects—whether that's creating new homes, converting existing buildings, or delivering commercial space. Unlike a standard mortgage, development finance is usually structured around the realities of building work: staged costs, specific timelines, and a clear route to repayment once the project is complete.

Because development finance is risk-led, lenders focus on whether the project is viable and deliverable. That means they look closely at the expected end value (GDV), the realism of the cost plan, the build programme, and the strength of the development team and exit strategy.

This guide explains how development finance works, the common types you may encounter, the key metrics lenders assess, and the typical steps involved in securing funding.

Understanding development finance

What is development finance?

Development finance is a loan facility designed to help fund the costs of developing a property. Rather than releasing funds as a single lump sum, it is commonly drawn down in stages (often milestone-based) as the work progresses.

A development finance facility may be used to cover:

• purchasing land or an existing site
• construction and build costs
• professional fees (architects, engineers, surveyors)
• planning and statutory costs
• site preparation and remediation
• contingency reserves
• certain holding costs, depending on the structure
• interest, which may be serviced or rolled up depending on the agreement

Development finance is often used for projects where the borrower expects value to be created through development—such as increasing the number of units, improving the property, or changing its use.

Repayment is usually planned around one or more outcomes:

• selling the completed units
• refinancing into longer-term finance after completion
• a combination of partial sales and refinance (for example, selling some units while retaining others)

Typical characteristics

While every lender's approach differs, development finance is commonly characterised by:

• shorter terms than mainstream residential mortgages, reflecting the build and sale/refinance timeline
• project-based underwriting, where the scheme's viability matters as much as the borrower's finances
• loan-to-cost and/or loan-to-value style limits, based on what the lender believes the project will cost and/or what it may be worth on completion
• staged drawdowns, releasing funds as milestones are reached rather than in one lump sum

When development finance is commonly used

Development finance is often considered when a project doesn't fit mainstream mortgage products—particularly where staged drawdowns, project monitoring, and a defined route to repayment after completion are required.

It may suit a range of schemes, including:

• buying land for new builds
• converting existing buildings (for example, commercial-to-residential)
• heavy refurbishment where structural changes or major redesign are involved
• multi-unit developments, including phased schemes
• mixed-use projects
• developments with clear build milestones and an evidence-led exit plan

Key features of development finance

When assessing development finance, it helps to understand the features that shape both the risk and the cost of the facility.

Loan size and funding limits

Many development finance arrangements are based on a percentage of the project's costs (often referred to as loan-to-cost) and/or a percentage of the expected value after development (often referred to as loan-to-gross development value). The exact percentages depend on the project type, location, planning status, and the lender's view of risk.

In general terms, lenders may cap borrowing based on:

• land purchase costs (where the site is being acquired before works begin)
• construction costs (once the project is underway)
• overall project cost (depending on the structure and security)

It's also common for lending to be staged, so the maximum facility available at the outset may not equal the total amount drawn down by the end of the project.

Interest structure and cost of borrowing

Development finance interest can be calculated in different ways depending on the lender and the facility structure. A common structure is interest rolled up—meaning interest is added to the loan balance and settled when the loan ends. Some arrangements may be interest-only during the development period, with repayment aligned to completion and exit.

Because development finance is typically higher risk than a standard mortgage, the overall cost of borrowing can be influenced by factors such as:

• the project's planning and technical risk
• the borrower's experience and track record
• the strength of the exit strategy (for example, sale, refinance, or long-term letting)
• how quickly the project is expected to complete

Security and risk controls

Lenders usually take security over the site and may also require additional protections, such as:

• conditions tied to planning progress and construction milestones
• valuation reviews at key stages
• monitoring of spend and progress
• requirements around contractors and build programme

Key metrics lenders assess

While each lender has its own underwriting approach, development finance decisions typically revolve around a consistent set of project metrics.

1) Gross Development Value (GDV)

GDV is the expected market value of the completed development. Lenders use GDV to understand whether the project's end value can support repayment. GDV assumptions are usually supported by evidence such as comparable sales, appraisal methodology, and market testing.

2) Loan to Cost (LTC)

LTC compares the proposed borrowing against the total development cost. This includes professional fees and contingency. A lower LTC can indicate more borrower equity and may reduce lender risk, but the "right" level depends on the project type, location, and the credibility of the cost plan.

3) Loan to Value (LTV)

LTV compares the borrowing to the value of the asset. Depending on the stage of the project, this may refer to the land value or the value of an existing property. Where the project involves land already owned, LTV can influence how the facility is structured.

4) Developer experience and delivery capability

Lenders assess whether the borrower and wider development team have delivered similar projects. This includes track record, relevant experience, and the strength of the delivery plan.

5) Equity contribution and risk balance

Most development finance arrangements require the borrower to contribute equity. The level of equity can vary, but lenders typically expect a meaningful stake so incentives remain aligned.

Types of development finance

Development finance can be tailored to different project sizes, end uses, and stages.

By end use

Commercial development finance

Commercial development finance is used for schemes where the end product is primarily commercial—such as offices, retail space, industrial units, or mixed-use developments.

Key considerations often include:

• the expected rental or sale profile for the finished space
• letting risk (if the plan involves leasing rather than immediate sale)
• market demand and comparable evidence

Residential development finance

Residential development finance is designed for projects that create new homes or refurbish existing properties for residential use. This may include:

• small-to-medium housing developments
• conversions into flats or houses
• larger schemes where the lender is comfortable with the delivery plan

Residential schemes typically focus heavily on the planned unit mix, build programme, and the expected end-market.

Bespoke development finance

Some projects don't fit neatly into standard categories. Bespoke development finance may be used where the scheme is unusual in size, complexity, or structure.

Examples of why a bespoke approach may be considered include:

• mixed-use or phased developments with different end products
• complex refurbishment where costs and timelines are harder to predict
• joint venture structures or alternative exit routes

In these cases, the facility terms may be tailored to reflect the project's specific risks and funding needs.

By project stage

Land acquisition finance

Used to fund the purchase of land before construction begins. Lenders may require evidence around planning status and the feasibility of the development pathway.

New build finance

Supports developments built from the ground up, often with drawdowns tied to build milestones.

Conversion finance

Used for projects converting existing buildings, such as office-to-residential. Lenders typically review conversion design, cost certainty, and any constraints arising from the existing structure.

Heavy refurbishment finance

Designed for substantial works that may affect layout, building integrity, or use. These projects usually require robust cost planning and credible contractor capability.

Mezzanine (top-up) structures

In some cases, mezzanine finance is used to bridge funding gaps where the main facility doesn't cover the full requirement. This can increase overall cost due to the additional risk position.

Typical costs and fees to expect

Development finance costs vary widely depending on project size, complexity, location, and perceived risk. It's important to consider the full cost profile, not just the headline interest.

Common cost components include:

• interest (and how it is calculated over the facility term)
• arrangement fees
• valuation and surveyor fees
• monitoring surveyor fees during construction
• legal fees (for both lender and borrower)
• drawdown administration and reporting requirements
• exit-related fees (where applicable)

In many development finance structures, interest may be rolled up or serviced in a way that reflects the staged nature of the project—so understanding repayment mechanics is essential.

The development finance process

While each lender has its own workflow, the process typically follows a similar pattern.

1) Initial planning and information gathering

Before applying, borrowers usually need to assemble core project information, such as:

• a clear development plan and timeline
• a cost breakdown (including professional fees and contingency)
• planning status and supporting documentation
• details of the intended exit strategy
• evidence of capability (for example, experience, team, and contractor arrangements)

A lender will want to understand not only what you plan to build, but how and when the project will reach completion.

2) Application and lender assessment

Once an application is submitted, lenders typically carry out due diligence. This can include:

• reviewing the project's budget and assumptions
• assessing planning and technical risk
• considering the borrower's financial position and experience
• valuing the site and/or assessing expected completion value

In many cases, lenders also focus on the relationship between the amount being borrowed and the project's total cost and/or expected end value.

3) Facility terms and conditions

If the lender is comfortable with the proposal, the facility will be offered with terms that reflect the project's risk profile. Conditions may include milestones that must be met before further drawdowns.

4) Drawdown and construction monitoring

Development finance is often released in stages. This helps ensure funds are used in line with the build programme and allows the lender to monitor progress.

Staged drawdowns also create a framework for monitoring progress and can help manage cash flow and reduce the amount of interest payable on funds that have not yet been required. Lenders may require evidence that milestones have been met before releasing the next tranche.

During the construction period, lenders may require updates and evidence of progress, and they may revisit valuations or assumptions if circumstances change.

5) Repayment and exit

Repayment is usually linked to the project's completion and the borrower's exit route. Common exit routes include:

• selling the completed units or property
• refinancing onto a longer-term facility
• partial sales with retention of remaining units (for example, holding some for rental income)
• other agreed repayment structures depending on the scheme

Having a realistic exit strategy is central to how development finance is underwritten. The chosen exit strategy can influence lender comfort, timing assumptions, and the way the facility is structured.

Documents lenders commonly request

Development finance applications typically require an evidence-based submission. Common documents include:

• planning permission (or planning reference and status)
• development appraisal showing assumptions and viability
• full cost plan and timeline
• schedule of works
• contractor and professional team information
• evidence supporting GDV assumptions
• exit strategy explanation
• financial information relevant to the borrower and project

Key points borrowers often consider

Development finance decisions are rarely based on one factor. Lenders and borrowers typically weigh up:

• planning status: whether planning is secured, pending, or subject to conditions
• programme and delivery: the credibility of the build timeline and contractor arrangements
• budget robustness: how well costs are estimated and whether contingency is included
• exit clarity: whether the finished project can be sold or refinanced on acceptable terms
• borrower experience: how familiar the borrower is with development risk and delivery

The following elements can strengthen an application:

• a development appraisal that is transparent and evidence-led
• a detailed cost plan with an appropriate contingency
• a delivery plan with credible programme milestones
• a reputable contractor and a clear project management approach
• an exit strategy that aligns with market conditions and timing

Development finance vs bridging finance (quick comparison)

Development finance and bridging finance are both short-term solutions, but they are used for different purposes.

Frequently asked questions

Can I get development finance with bad credit?

It may be possible, but outcomes vary significantly by lender and by the overall strength of the application. Development finance is assessed on the project as well as the borrower, so lenders may focus on factors such as the scheme's viability, planning position, and exit prospects.

What are typical interest rates for development finance?

Interest rates vary widely depending on the lender, the project risk profile, and the structure of the facility. The cost of borrowing is influenced by how predictable the project is to deliver and how clear the repayment route is. Specific rates and pricing vary by lender and by the details of the project—we can help you compare options based on your circumstances.

Is it possible to obtain 100% development finance?

Full funding is uncommon in standard development finance structures. Some projects may be funded through alternative arrangements such as joint ventures, additional collateral, or other bespoke structures, but these depend on the lender's appetite and the project's risk.

How does repayment work?

Repayment is usually aligned with the project's completion and exit strategy. Many facilities are structured so that repayment occurs when the development is sold or refinanced, rather than through monthly repayments throughout the build period.

How long does development finance take to arrange?

Timelines vary by lender and project complexity. Development finance often takes several weeks from initial assessment to formal offer, with additional time for technical reviews and document gathering.

Can first-time developers obtain development finance?

It can be possible, but lenders typically look for stronger evidence—such as relevant experience within the wider team, a credible contractor, and a well-supported delivery plan.

Do lenders require planning permission before funding?

Many lenders prefer planning permission to be in place, but requirements can vary. Where planning is not fully secured, lenders may apply stricter terms or request additional evidence.

Is it possible to refinance after completion?

Often, yes. Many developers plan to refinance into longer-term finance once the completed property is ready and the exit route is clearer.

What affects the cost of development finance?

The overall cost is influenced by perceived project risk, the strength of GDV assumptions, the quality of the cost plan, the borrower's experience, and the facility structure (including fees and repayment mechanics).

What is GDV in development finance?

GDV (Gross Development Value) is the expected market value of the completed development. It is used to assess whether the project can realistically repay the facility.

Do lenders fund refurbishment and conversion projects?

Yes. Conversion and heavy refurbishment projects can be funded, but lenders focus on feasibility, cost certainty, and delivery risk.

Do lenders check the contractor's experience?

They usually do. Contractor capability is often a key factor in how lenders assess delivery risk.

Are there fees in addition to interest?

Yes. Development finance can involve arrangement, valuation, monitoring, and legal fees, plus potentially exit-related costs—so reviewing the full cost profile is important.

Summary

Development finance is a specialist way to fund property development for both commercial and residential projects. Understanding the main types of development finance, the key metrics lenders assess (GDV, LTC, LTV), how facilities are structured, and how drawdowns and repayment typically work can help you plan a scheme with a clearer funding pathway from start to finish.