Property Development Finance

Development finance is the source of funding for various kinds of projects. We explain how development finance works, how it differs from mortgages and what to consider. 

What is development finance?

Development finance is funding specifically for property development projects. It provides a loan to build new properties, renovate existing ones or convert them for a different purpose. 

Development finance supports the whole lifecycle of a development project, from purchase to completion. It tends to release money stage by stage, to protect the lender and ensure the project progresses as planned. 

How is development finance different from traditional property finance?

Traditional property finance, such as residential or commercial mortgages, is purely intended for purchasing or refinancing properties. A mortgage is often unsuitable for a property development project, as the property must be ‘habitable’ to qualify – which usually requires a working kitchen, bathroom, electrics and water.

Property development finance is specifically tailored to the construction or renovation of properties. It allows for the purchase of land, it takes into account the future value of the property after development and provides funds in stages as the project progresses.

Who can benefit from development finance?

Development finance can help anyone involved in property development, from property developers, builders and investors to companies undertaking large-scale projects and even people looking to build their own homes. 

It can provide substantial funding for development projects where people don’t have the capital available, or don’t want to use their existing assets as security.

What are the different types of property development finance available in the UK?

Types of development finance options include development loans, bridging loans for development projects, mezzanine finance, joint venture funding and equity finance. Each type has its own characteristics, terms and repayment structures, so that borrowers can choose the most suitable option based on their specific needs.

The best way to understand how the different types of lending work, and which is the most appropriate, is to talk to a financial advisor. We will recommend the form of lending and a provider that will best help you achieve your goals. 

What are the key requirements for obtaining development finance?

The requirements can vary depending on the lender and the nature of the project. Generally, lenders will look at the borrower’s experience and track record in property development, the viability and profitability of the project, the borrower’s financial position and the quality of the development team involved. 

A solid business plan, detailed cost projections, and a clear exit strategy are also crucial for securing development finance. Again, a good broker can help you make sure you have the credentials and plans in place to secure the finance you need.

What are the common mistakes people make when applying for development finance?

Generally, issues tend to come down to lack of preparation. Insufficient project research and planning, underestimating costs and timelines, lack of a robust business plan, inadequate market analysis, poor financial management and inadequate contingency plans can all undermine your application and the progress of the project. 

It is important to plan with close attention to detail and seek professional advice to avoid the pitfalls.

How much can someone borrow for a development project?

Lending for a development project depends on various factors, including the project’s scale, complexity, location, profitability and the borrower’s financial capacity. 

Typically, lenders look at the loan-to-cost (LTC) ratio to calculate how much of the total development costs they will finance. The LTC ratio can range from 50% to 90%, depending on the project and the lender.

Is development finance more accessible now than it used to be?

Yes – it’s generally easier to find development finance today, as development demand development has grown leading to more competition among lenders. More lenders now offer development finance, including traditional banks, specialist lenders and alternative finance providers. 

This increased accessibility has opened up opportunities for a broader range of borrowers to secure funding for development projects.

What advice would you give to someone who is considering applying for development finance?

The most important elements are clear planning and professional advice. You need to create a comprehensive business plan, including detailed cost projections, market analysis and an exit strategy to repay the lending – whether that will be to sell the property or refinance it with a mortgage. 

Be realistic about your capabilities and experience. If you are fairly new to property development, make sure you have a strong team to support you with planning, financials and construction. 

Talk to a reputable broker like First Thought Finance – we specialise in development finance and can guide you through the process, get you a suitable lender and help structure your application. Get in touch today for an initial chat about your plans.

As a mortgage is secured against your home or property, it may be repossessed if you do not keep up the mortgage repayments. Think carefully before securing any other debts against your home.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

The Financial Conduct Authority does not regulate commercial buy to let mortgages
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Your home may be repossessed if you do not keep up repayments on a mortgage or other debt secured on it.

Some Bridging Loans are not regulated by the Financial Conduct Authority

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