PROPERTY FINANCE - development finance

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What is property development finance? 

Property development finance is a form of short term funding to support and fund development projects, either in stages or as one lump sum release. This creates a flow of cash into your project as and when you need it most. Whether you are looking to develop a residential, commercial, or mixed use project, development finance can help you take that step. 

Development finance typically requires risk assessments and using the property being developed as collateral for the loan. Development finance also comes with interest rates and terms that vary based on factors such as project type, the level of developer experience, and the strength of the business’ credit score

How does development finance work? 

Development finance can be adapted to provide you with access to a fixed lump sum, or instalments paid in stages. It helps you to keep on top of your budget whilst potentially giving you the flexibility to borrow more should additional costs arise.

Development finance typically lasts for just 12 to 24 months and is usually repaid on an interest only basis, plus any arrangement fees which are agreed with you in advance. This is particularly beneficial when it comes to preserving your working capital as the total amount borrowed will be repaid at the end of the agreement when the sale is eventually made.

Who is development finance for?

Development finance can be a great option for anyone involved in or looking to take on a project to construct, build or improve a property. It primarily caters to property developers, and professionals within the property industry, however it is possible to get development finance without prior experience. 

Development finance is useful for a person or business looking for funds to acquire land, finance construction or renovation projects, and cover associated costs, such as materials, permits or labour. Essentially, development finance supports your property goals, making it easier to buy, improve, and transform properties while contributing to the growth of your business.

Development finance advantages and disadvantages

Advantages of development finance

  • Development finance provides access to the significant capital required for land acquisition, construction, and development costs. This allows a business to undertake larger and more profitable projects than they could with their own funds.
  • Developers can leverage their existing capital by securing property development finance, allowing them to spread the financial risk across multiple projects and potentially achieve higher returns on investment.
  • Property development finance can be structured to match the project's timeline, with flexible repayment terms that align with expected cash flows from the completed development.
  • Developers can diversify their property portfolio by taking on a variety of projects, such as residential, commercial, or mixed-use developments, using property development finance.
  • Successfully executed property development projects can yield substantial profits, making development finance an attractive option for developers seeking higher returns.

Disadvantages of development finance

  • Development finance typically comes with higher interest rates and fees compared to long term options such as a commercial mortgage.
  • Property development can be a risky industry, so if a project encounters unexpected issues, it can lead to financial losses and developers may be personally liable for repayment of the loan. 
  • Securing development finance can be more complex to obtain compared to a business loan.
  • Lenders typically require a certain loan to value (LTV) ratio, which means developers must contribute a significant amount of equity upfront. This can limit the number of projects a developer can undertake simultaneously.
  • You will be required to meet the repayment obligations of property development finance, which can put pressure on project timelines and cash flow if the project encounters delays or cost overruns.

What do I need to apply for development finance?

To apply for development finance, it’s likely you will need the following: 

  • Relevant experience with development projects 
  • Full development costs and timescales
  • Details of who will be carrying out the actual construction, whether this will be the developer, or will be contracted out 
  • Loan to Gross Development Value (LGDV)
  • Loan to cost (LTC)
  • An exit strategy - for example will the loan be repaid by a sale of the property, or a long term option such as a commercial mortgage
  • The asset type and location
  • An external valuation of the development

You will also need to provide the following documents: 

  • Detailed planning permission. This will need to be in place and not in progress. 
  • Evidence of previous experience, such as a CV. 
  • Latest annual financial statement, if operating through a trading business. 

How much can you borrow with development finance?

How much you can borrow from a property development finance lender will depend on a percentage of the Loan to Gross Development Value (LGDV) and the loan to cost ratio (LTC).

The amount can vary depending on the lender and the project, but typically you could look to borrow:  

  • 90% of the loan to cost 
  • 65% of the loan to gross development value 

Why Use Property Development Finance?

Access the financial resources needed to support your next development.

Specialist Lenders

By working with a specialist commercial property development finance partner, you'll be able to take advantage of their experience working with single unit projects and larger, multi-unit schemes.

Many are able to offer highly favourable LTV ratios, with flexible, contactable decision makers on hand to carefully assess each individual application.

Tailored Financing

Each business loan for property development is carefully structured around the timeline of each project. Your lender will work with you to understand core facets including building plans, costs, estimated profit and timescales to create an affordable repayment schedule with dedicated customer support every step of the way.

Adaptable, Flexible Loans

From ground-up developments to light refurbishments, commercial property development finance can be used for a wide variety of property investments. They're great for borrowing over the life cycle of the development, giving you plenty of time to complete your build and sell or rent it out for profit.

Get your development finance with Capitalise

Almost every development finance, bridging loan or commercial mortgage can be adapted to provide you with access to a fixed lump sum or instalments paid in stages. It helps you to keep on top of your budget whilst potentially giving you the flexibility to borrow more should additional costs arise.

Development finance typically lasts for just 12 to 24 months and is usually repaid on an interest only basis, plus any arrangement fees which are agreed with you in advance. This is particularly beneficial when it comes to preserving your working capital as the total amount borrowed will be repaid at the end of the agreement when the sale is eventually made.

Sign up with Capitalise today and browse a large selection of specialist  property development finance partners who can help you to quickly and easily access the funds needed to take on your next project.

Frequently asked questions about development finance

One of the ways you can finance a property development is by applying for a loan with Capitalise. We work with a number of specialist property development lenders, so our funding specialists can help match you with the right option for your business. 

Some development finance lenders will have an exit fee, this is typically 1-2% of the total loan amount. However it will depend on the individual lender whether they have an exit fee and how much this may be. 

Yes, having a well-defined exit strategy is important when applying for a property development loan. Lenders want to know how you plan to repay the loan once your project is completed. Common exit strategies include selling the developed property, refinancing with a mortgage, or leasing the property for rental income. A clear exit strategy demonstrates to lenders that you have a plan to generate the necessary funds for loan repayment.

Many lenders will require evidence of planning permission when considering an application for development finance. This is because having the necessary permission in place reduces the project's risk and increases the likelihood of successful completion. Before seeking development finance, it's a good idea to obtain the required planning permissions and provide this documentation as part of your application. 

Development finance and bridging loans are similar as they both offer a short term finance solution. A key difference between the two is that a bridging loan can be used for a variety of business purposes, while a development loan is only suitable for a property development project. Another difference is that a development loan can involve funds being released in increments, at different stages of the development. Whereas with a bridging loan, funds are typically released as a lump sum. 

While you could get development finance with bad credit, it could be more challenging as lenders typically consider your business credit score when assessing your eligibility. Having  bad credit could limit your options for development finance or subject you to more expensive rates, so you should consider steps to improve your credit score or have your credit score reviewed before applying for development finance.