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Mortgages for Business

Property Development Finance Application Process

What is property development finance?

Property development finance is funding for either major new building projects or comprehensive renovations. We can source finance for residential, commercial and mixed-use developments.

How does development finance work?
Development finance is designed to help with the purchase and build costs of a development or refurbishment project. Depending on the loan and project size, lenders will release funds in stages rather than all in one go. Doing this helps developers and lenders keep track of spending and the physical progress of the project.

For larger-scale projects, the drawdown of the development funds is subject to independent monitoring surveyor (IMS) sign off. Lenders use these surveyors to check works are both on time and within budget.

For smaller-scale projects such as refurbishment, you may well be able to drawdown all the funds at once, depending on the lender. An experienced development finance broker like Mortgages for Business will be able to advise how lenders will likely approach your project.

How much development finance can you borrow?
The loan amount is based on a percentage of the gross development value (GDV) at the end of the work, currently up to a maximum of  70% loan to GDV, with a maximum of 85% of the total costs. Typically we work with developers looking for funding from as little as £250k through to projects needing finance above £25m. There really isn’t an upper limit, but a refurbishment loan is likely to be more suitable if you want to borrow a smaller amount.

Loans are typically structured to ensure that the developer’s contribution is utilised up front, with the lender providing the majority, if not all, of the build costs. It is usual for funds to be drawn down in stages against architect’s or quantity surveyor’s certificates.

For example:
A developer has planning permission to build three houses with the gross development value estimated at £4.5 million. The total costs involved are £3.1 million, made up of £1.25 million for purchasing the land and £1.85 million in build costs. A lender might agree to development finance of £2.325m (limited to 75% of costs) structured as £475,000 initial advance followed by the balance in stages throughout the build.

Projected gross property development values will influence loan to project costs, but funding is available on occasions of up to 85% of the purchase price and build costs.

It is often possible to organise a loan to finance up to 100% of the property development costs where the borrower already owns the land on an unencumbered basis.

Where the property developer can improve the planning consent post-acquisition, we can often negotiate increased levels of funding that recognise higher land and gross development values.

The amount you can borrow is based on the strength of your proposal. The quickest way to find out how much you will be able to borrow is to speak to one of our expert development finance brokers.

How long can you borrow for?
A property development loan is usually arranged on an interest-only basis, and the term of the loan would typically be 6 to 24 months, depending on the size and nature of the underlying project. 

We negotiate finance requirements with a full panel of property development lenders and other financial institutions to provide the right ‘match’ to the project.

When should you apply for development finance?
Development funding without full planning consent is challenging to secure unless you are highly experienced and have completed several development projects. Before seeking finance, it is essential to finalise planning consents and have all relevant documentation available to show your lender.

What rates can you expect to pay for development finance?
There are no set rates for property development finance. That’s where we come in. We have access to the whole market and work with a panel of specialist property development lenders and other institutions to find the right match and negotiate the best rate for each proposition.

The lenders assess each application individually and price according to the strength of the development proposition and the borrower. We have years of experience in this field. We know what information should be included within an application and how best to present it for submission.

That’s not to say we can’t give you an idea of what you might expect to pay. At the moment, a good benchmark starts from around 7%. Usually, the interest can be rolled up into the loan, so there are no monthly payments.

Your development finance application: where to start
Once you’ve identified the project and roughly worked out viability, costs, end value and profit margin, please contact us on 0345 345 6788. It doesn’t matter if you don’t already own the land/property.

We’ll ask lots of questions! We need to get as much information about your proposed project as possible to allow us to assess it and give an honest opinion as to whether we’ll be able to secure finance for you.

If we can help, we’ll provide you with an outline (known as indicative terms) of the rates and terms you can expect lenders to offer you, including a breakdown of anticipated costs and fees.

The proposal/application
If the indicative terms are acceptable to you, we will compile the proposal and submit your application to the most suitable lender. You should be prepared to provide a full development appraisal to include the following:

  • CV and evidence of previous development projects/experience
  • Details of the planning consent including any restrictions, Section 106 or Community Infrastructure Levy requirements
  • Drawings/plans
  • A full breakdown of the development costs  
  • Likely end value of the project (known as the Gross Development Value)
  • Schedule of works and build stages 
  • Timetable for release of funds which ties in with the end of each stage of the build
  • Asset and liability statement
  • Financial accounts
  • Full details of the professional team involved
  • Proof of identity
  • Exit strategy (e.g. sale or refinance)

Site visit
Lenders are always keen to meet the developer to understand the project from a professional and personal standpoint, so we will arrange a site visit between you and the lending manager. Usually, we will accompany you to help answer any questions and support your application.

Formal loan offer
After the site visit, the lending manager will submit a report on the project, which helps with the underwriting process. Your application is then submitted to the underwriters. At this stage, there is often a bit of toing and froing to ensure that the lender has all the information needed to make a decision. If the underwriting is favourable, your application will go before the lender’s credit committee for approval. Once the committee has approved the application, the lender will issue a formal loan facility offer, subject to the findings of a valuation report. The offer will confirm the precise terms of the loan, including rates, costs and fees.

The lender will require a valuation report which comments on specific aspects of the development. We will arrange for this to be carried out by a surveyor recommended by the lender. The surveyor will comment on:

  • The value of the site in its existing condition
  • Predicted build costs
  • Anticipated gross development value
  • Exit strategy - sale or rental potential on completion of the project

Legal process
If you accept the terms of the formal offer letter, you will need to sign and return it to the lender. At this point, you should instruct solicitors to carry out the legal work. In development finance applications, it is usual for the lender to have separate legal representation. Make sure you choose a solicitor who has relevant experience. Also, bear in mind that some lenders require the borrower’s solicitor to have at least two or three partners in the practice. 

The loan application is complete when the finance had been fully arranged. At this stage, the funds can start to be released in pre-agreed stages, subject to sign off by a quantity surveyor or architect. With most loan facilities, interest is only payable on the money drawn down.

When the development is complete, if the loan facility has an exit fee, this will need to be paid to the lender by the agreed date.  

If you’ve got any questions about the process or are ready to get going, get in touch!

If you’ve got any questions about the process or are ready to get going, speak to our development finance brokers today!