Development finance explained: how funding a build actually works

If you're planning to build, convert or seriously renovate property, an ordinary mortgage usually won't fit — the funding works in a completely different way. Let me walk you through development finance in plain English, so you know how it's put together before you ever speak to a lender or a broker.

What is development finance?

Development finance is short-term borrowing used to build, convert or heavily renovate property — anything from a ground-up housing scheme, to turning an old office block into flats, to a major refurbishment that goes well beyond redecorating.

It's secured against the site or the property you're developing, and it's meant to be temporary. You borrow while the work happens, then repay once the project is finished — commonly by selling the finished units, or by switching onto longer-term borrowing. Because it's tied to an actual build, it behaves very differently from a normal mortgage on a home you already live in.

Jargon note: when lenders talk about "the scheme", they just mean your development project — the plans, the build and the finished result.

How it works: staged drawdowns and rolled-up interest

Here's the part that surprises most people: with development finance you usually don't get all the money on day one. The funding is released in stages — often called "drawdowns" or "tranches" — as the build hits agreed milestones (foundations, first fix, roof on, and so on).

To check the work is really happening, lenders often appoint a monitoring surveyor who visits the site and signs off progress before the next chunk of money is released. It protects the lender, and it keeps the project honest.

Interest is frequently "rolled up" rather than paid month to month — meaning it's added to the loan and settled at the end, so cash isn't draining out while the site earns nothing. Lenders often charge interest only on the money you've actually drawn, not the full facility.

Two numbers do a lot of heavy lifting. GDV (gross development value) is the expected value of the finished scheme once it's all built and sold. Loan-to-cost compares the loan to what the project costs to deliver. As a general rule lenders will fund a share of the land and a large part of the build cost, while capping the total against a portion of the GDV — the exact proportions vary a lot from lender to lender and scheme to scheme.

What lenders tend to look at

Development lending is as much about the project and the people as the property. Typically a lender will want to understand:

• Planning permission — what you're allowed to build, and whether it's in place or still being sought.
• The end value (GDV) — backed by a professional valuation, not just optimism.
• Your experience — your track record on similar projects. First-time developers can still get funded, but it usually shapes the terms and the amount.
• The professional team — your contractor, architect and often a quantity surveyor (the person who prices and monitors build costs).
• Your own money in — most schemes expect the developer to contribute cash or equity, not just borrow everything.
• A credible exit — a clear, realistic plan for how the loan gets repaid at the end.

None of this guarantees an offer — every lender weighs these differently, and it's a real adviser's job to match a scheme to the lenders likely to consider it.

What it typically costs

I won't quote you rates or fees — those depend entirely on the lender, the scheme and the risk, and they change constantly. But it helps to know the types of cost that tend to show up, so nothing catches you out:

• Arrangement fee — a set-up charge, usually a percentage of the facility.
• Interest — often rolled up and charged on drawn funds.
• Exit fee — sometimes charged when the loan is repaid.
• Monitoring surveyor, valuation and legal fees — the professional costs of assessing and overseeing the project.

A responsible lender or adviser sets all of these out clearly and up front, so you can see the full picture before committing. It's completely fair to ask for every cost in writing before you proceed.

Getting out: the exit plan

Because development finance is short-term, lenders care a great deal about the exit — how the loan is repaid once the build is done. The two common routes are:

• Sell the finished units and repay from the proceeds.
• Refinance onto longer-term borrowing — for example a buy-to-let or commercial mortgage if you're keeping the property, sometimes called a "development exit" product.

Builds run over and markets move, so a sensible plan usually includes a contingency — a buffer of time and money for the unexpected. A realistic exit isn't just paperwork for the lender; it's what protects you if things take longer than hoped.

Development finance vs a mortgage vs bridging

These get muddled, so here's an even-handed way to tell them apart — each suits a different job:

• A mortgage is long-term borrowing on a property that's already habitable. It suits buying and holding a finished home or investment, not funding construction.
• Bridging is short-term borrowing to move fast — buying at auction, a quick purchase, or a lighter refurbishment. It suits speed and simpler works.
• Development finance is built for the construction itself — staged funding, cost monitoring and a value based on what the scheme will be worth once finished. It suits ground-up builds, conversions and heavy renovation.

There's no single "best" one — the right fit depends on the property, the works and your plans. That's exactly the kind of thing worth talking through with someone who can see the whole market.

Your property may be repossessed if you do not keep up repayments on a mortgage or other debt secured against it. This guide is general information, not advice.