Development Finance: How It Works

Development finance is short-term funding for building new homes, converting buildings or heavy refurbishment. Unlike a mortgage, the money is released in stages as the work is done, and repaid when the finished units are sold or refinanced, usually within 12 to 24 months.

Lenders are backing a project, not just a property. They want to know the numbers stack up, the planning is in place, the team can deliver and there is a clear way out at the end. Get those four things right and you have a fundable scheme.

This guide covers how it works, the key ratios, what lenders want, costs and exits. For shorter projects, see our bridging loan guide.

How does development finance work?

The lender funds part of the land and most or all of the build cost, released in stages. A monitoring surveyor checks each stage before money is released. Interest is usually rolled up and paid at the end. You repay the loan by selling the finished units or refinancing onto longer-term mortgages. Most lenders cap the loan at around 60% to 70% of the finished value.

What are the stages?

1. Land or building purchase: the lender advances part of the price at the start.
2. Build costs in stages: money is released in tranches as work is completed.
3. Monitoring surveyor: inspects the site and signs off each stage before funds are released.
4. Interest is usually rolled up and repaid at the end.
5. Exit: sale of the units or refinance onto investment mortgages, sometimes via a development exit loan.

What are the key ratios?

Measure	What it means	Typical maximum
Loan to cost (LTC)	Loan as a share of land plus build costs	Often 65% to 90%
Loan to GDV	Loan as a share of the gross development value, the finished value	Often 60% to 70%
Build costs funded	Share of construction costs the lender covers	Often up to 100%

Which projects do lenders see most?

These are illustrative situations, not Option Finance client outcomes.

What do lenders want?

• Planning permission in place, or a clear route to it. See GOV.UK’s planning permission guide.
• Building regulations sign-off at the end. GOV.UK explains building regulations approval.
• A detailed appraisal: costs, contingency of often 5% to 10%, fees, finance costs and end values backed by comparable sales
• Experience: a track record of similar projects, or an experienced professional team for newer developers
• Build contract and team: contractor, architect, quantity surveyor
• Your contribution: usually some cash in the deal, often in the land
• Personal guarantees from the directors

What does development finance cost?

• Interest, usually rolled up
• Arrangement fee, often 1% to 2%
• Exit fee, often 1% of the loan or GDV with some lenders
• Monitoring surveyor and valuation fees
• Legal fees

What are mezzanine finance and equity?

If the main loan does not cover enough, mezzanine finance can sit behind it to reduce your own contribution, at a higher cost. Some projects use equity partners who put money in for a share of the profit.

What about smaller projects?

Light or heavy refurbishments that do not need the full development structure are often funded with refurbishment bridging. See our refurbishment finance guide. If you are buying the site first, see our land mortgage guide.

Frequently asked questions

Speak to Option Finance about your project

Send us your appraisal, planning and team details. We will tell you straight how lenders will see it, find lenders that suit the scheme and your experience, and plan the exit.

Book a free initial consultation using the enquiry form below. See also our bridging and development finance advice.