What development finance is, and why it is not a mortgage or a bridge
Property development finance is short-term funding built for one job: paying for the land and the construction of a scheme, and getting repaid in a single event when that scheme is finished and sold or refinanced. It is the money that turns a site into buildings. Because it funds something that does not yet exist, it works very differently from the two products developers most often confuse it with, a mortgage and a bridging loan.
A mortgage lends against a finished, income-producing asset and is repaid slowly over many years from rent or trading profit. A bridging loan is a lump sum, drawn in full on day one, secured against a property that already stands, and used for a short, defined purpose such as a fast purchase or a cosmetic refurbishment. Development finance is neither. It is staged: the lender releases the build cost in tranches as the work is physically done and certified, and it is sized against the future, specifically against the projected value of the completed units and the total cost to deliver them, rather than against what the site is worth today.
That single difference, funding a moving target in stages, shapes everything else about the product: the two metrics that size it, the day-one land advance, the way interest is charged, the monitoring surveyor who signs off each drawdown, the capital stack that sits behind it, and the exit that repays it. This guide walks through each in turn, for UK property investors, developers and business owners building or converting property through a company, SPV or partnership. It is educational: it explains how the product works and how it intersects with your tax position, and it points you to the right people for the parts that need regulated advice.
One quick note on scope before the detail. This is a full pillar guide; there is a shorter primer on the same topic at our housing development finance overview, which this page expands on considerably.
The two metrics that size every development facility: LTGDV and LTC
Almost every decision a development lender makes runs through two ratios. Get comfortable with both, because they explain why two schemes with the same build cost can be offered very different amounts.
Loan to gross development value (LTGDV) measures the facility against the gross development value, the projected market value of the completed scheme once every unit is built and sold. If a scheme has a GDV of two million pounds and a lender caps LTGDV at 65%, the value test allows a facility of up to 1.3 million pounds. As at July 2026, senior lenders commonly cap LTGDV somewhere in the region of 65% to 70%, though this moves with the market and the risk of the individual deal, so treat it as a band to verify, not a fixed number.
Loan to cost (LTC) measures the facility against the total cost of the project. Total cost is not just the build; it is the land, the construction, professional fees, finance costs (including the rolled interest and lender fees themselves), and a contingency. Senior lenders often cap LTC at around 85% to 90%, and a stretched senior facility can push toward the top of that band. On a project costing 1.44 million pounds all in, a 90% LTC cap allows up to roughly 1.3 million pounds on the cost test.
Here is the point that catches people out: the lender applies both tests and advances the lower of the two figures. A scheme with a thin margin between cost and value is constrained by the GDV cap, because there is not much value to lend against. A scheme with a fat margin is constrained by the cost cap, because the value test would allow more than the lender is willing to fund against cost. The two ratios act as a pincer, and the developer's own equity fills whatever gap they leave. This is also why a good margin, the spread between what it costs to build and what the finished scheme is worth, is the single most important number in a development appraisal.
The day-one land advance and staged build drawdowns
A development facility is not handed over as one cheque. It is released in a sequence that mirrors the build.
On completion of the land purchase, the lender advances the day-one land tranche, typically around 50% to 70% of the land value or purchase price, whichever is lower (as at July 2026, and driven heavily by the planning position). Land with detailed, implementable planning consent supports a higher advance because the risk of the scheme never happening is lower. Land bought with only outline consent, or none, attracts a bigger haircut, and some lenders will not advance against unconsented land at all. The developer funds the rest of the land purchase from their own equity, which is why on many schemes the equity requirement is, in effect, most of the land cost.
From there, the build cost is drawn in stages. The developer (or their contractor) completes a phase of work, the lender's monitoring surveyor inspects and certifies it, and the next tranche is released, usually in arrears (you fund the work, then get reimbursed on certification). Drawdowns are set against a schedule of works or a build programme agreed at the outset. Because interest is charged only on funds actually drawn, this staged structure keeps the cost of finance down early in the project and rising as the build accelerates.
Two practical consequences follow. First, the developer needs working capital to bridge the gap between paying for a stage and being reimbursed for it, which first-time developers routinely underestimate. Second, the land tranche and the build tranches together must stay within the single overall facility limit, so a larger day-one advance leaves less room for build funds. Lenders size the whole package as one, not as two separate loans.
How interest and fees work on development finance
Development finance is priced and charged in a way that reflects the fact that a building site produces no income to service a monthly payment.
Interest accrues only on drawn funds. You do not pay interest on the full facility limit, only on what you have actually taken. Early on, when just the land tranche is out, the interest cost is modest; it climbs as build drawdowns are released. This is fundamentally different from a term loan where interest runs on the whole balance from day one.
Interest is usually rolled, not serviced. Because there is no rent or sale income during the build, monthly interest payments are impractical, so interest is normally rolled up, added to the loan balance and repaid at the end out of the exit. Retained interest (the lender sets aside a slice of the facility to cover interest) is a variation on the same idea. Either way, the interest is part of total cost and consumes facility headroom, so it has to be budgeted from the start, not treated as an afterthought.
Pricing is a margin plus fees. Development interest is typically expressed as a margin over a reference rate, most often the Bank of England base rate or a comparable benchmark. On top of the rate sit an arrangement fee (commonly around 1% to 2% of the facility) and an exit fee (charged on redemption, sometimes calculated on loan and sometimes on GDV), plus valuation, monitoring surveyor and legal costs. Because there are several moving parts, the headline rate alone never tells you the true cost of the money. As at July 2026, all-in senior development pricing sits across a wide band depending on gearing, experience and the deal, so any single figure ages quickly; confirm live pricing with a lender or broker before you appraise a scheme.
Ground-up, heavy refurbishment and conversion: what the facility covers
Development finance is not only for building from a bare site. It covers the range of works that carry genuine construction and planning risk, which is what separates it from bridging.
Ground-up construction is the classic case: buy a plot with consent, build houses or flats, sell or refinance. The whole build is drawn in stages against the programme.
Heavy refurbishment means structural works, extensions, or a project big enough that it is drawn and monitored in stages rather than funded as a single bridging advance. The line between a light refurbishment (a bridging job) and a heavy one (development finance) is roughly whether the work touches structure, planning or building control, and whether it needs staged funding against certified progress. A cosmetic refit is a bridge; taking a building back to brick and reconfiguring it is development finance.
Conversion and change of use covers turning one type of building into another, a commercial unit into flats, a house into multiple units, an office into residential. Here the planning position is central: the lender needs to know whether the works are permitted development or need a full application, and whether liabilities such as the Community Infrastructure Levy or affordable-housing contributions apply. Change of use carries planning risk on top of construction risk, which is exactly why it sits in development finance territory.
Whether a project counts as a development trade or an investment is a separate, tax question that turns on your intention and conduct, and it changes how the profit and the interest are taxed. That distinction is covered in depth on our tax pages; see are you a property investor or a developer and, for the residential angle, residential property developer tax. The finance product is the same; the tax outcome is not.
The capital stack: senior, stretch senior and mezzanine
Larger or more ambitious schemes are often funded by more than one layer of debt. Understanding the capital stack, the order in which lenders are repaid, explains why some money is cheap and some is expensive.
| Layer | Position | Typical gearing | Relative cost | Role |
|---|---|---|---|---|
| Senior debt | First charge, repaid first | Up to ~75% to 85% LTC | Lowest | The core facility that funds most of the build |
| Stretch senior | First charge, repaid first | Up to ~90% LTC | Slightly higher than senior | A single senior facility pushed higher so the developer needs less cash |
| Mezzanine | Second charge, repaid after senior | Fills the gap above senior | Materially higher | Top-up debt that reduces the developer's equity, at a price |
| Developer equity | Repaid last | The balance | Highest risk, keeps the profit | The developer's own cash and the residual profit share |
Senior debt sits at the bottom of the stack. It is the safest money because it is repaid first out of the exit, so it is the cheapest. Stretch senior is not a second loan; it is the same senior lender agreeing to push to a higher loan to cost, so the developer puts in less of their own equity, in exchange for a slightly higher rate. Mezzanine is a genuinely separate, usually second-charge layer that fills the gap between what senior will lend and the cash the developer can commit. Because mezzanine is repaid only after the senior debt, it carries more risk and is materially more expensive, often several times the senior rate, and sometimes structured as a profit share rather than pure interest. The trade-off is straightforward: mezzanine and joint-venture money let a developer do more, or bigger, schemes with less of their own cash, at the cost of a much larger slice of the profit. That decision, and its tax treatment, is covered on our mezzanine and JV finance guide.
A worked example: a two-million-pound residential scheme
To bring the ratios together, consider a small residential development. The numbers are illustrative and rounded to show the mechanics, not a quote.
A developer buys a consented site to build a terrace of new houses. The figures are:
- Gross development value (GDV): £2,000,000 (the projected value of the finished houses)
- Land cost: £500,000
- Build cost: £800,000
- Professional fees, finance and contingency: roughly £140,000
- Total cost: approximately £1,440,000
Now apply the two caps. On the GDV test, a 65% LTGDV cap allows up to £1,300,000 (65% of £2m). On the cost test, a 90% LTC cap allows up to roughly £1,296,000 (90% of £1.44m). The lender advances the lower of the two, so the facility comes in at around £1,296,000. The developer funds the balance, roughly £144,000 of the total cost, from their own equity.
Within that facility, the lender might advance a day-one land tranche of around 60% of the £500,000 land value, about £300,000, with the developer funding the remaining £200,000 of the land purchase from equity. The build cost is then drawn in stages against the monitoring surveyor's certificates, and interest is rolled up on the drawn balance throughout. When the houses are built and sold for the projected £2m, the sale proceeds redeem the facility (capital plus rolled interest plus fees) first, and what remains is the developer's gross profit before tax.
Notice how the pincer worked here: the GDV cap (£1.3m) and the LTC cap (£1.296m) landed within a whisker of each other, which is typical of a well-appraised scheme. Change one variable, say the build cost overruns to £950,000, and total cost rises, the LTC test tightens, and either the developer finds more equity or the deal stops stacking up. That sensitivity is why lenders insist on a contingency line and a monitoring surveyor.
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Experience, the appraisal, planning and the monitoring surveyor
A development lender is underwriting delivery, not just numbers. Four things carry most of the weight.
Developer experience. A track record of delivering comparable schemes on time and on budget unlocks higher gearing, keener pricing and larger projects. First-time developers are not shut out, but they typically see lower loan to cost, closer scrutiny of the professional team, and sometimes a requirement for a fixed-price build contract or an experienced partner. The lender's main way of losing money is a stalled or over-budget build, so it underwrites the people as hard as the site.
The appraisal. The scheme appraisal is the financial model: GDV, costs, fees, finance, contingency, and the resulting margin. A lender stress-tests it for realistic sales values, a proper contingency (commonly around 5% to 10% of build cost), and a build programme that is achievable. An over-optimistic GDV or a missing contingency is the fastest way to a decline.
Planning. The planning position drives both whether the scheme can happen and how much can be advanced day one. Detailed consent supports the highest gearing; outline or no consent means a lower advance and more risk. Conditions on the consent, and any Section 106 or Community Infrastructure Levy liabilities, feed straight into the cost side of the appraisal.
The monitoring surveyor. The independent monitoring surveyor is a qualified surveyor the lender appoints (at the borrower's cost) to protect its position during the build. They review the costings up front, then certify each stage before the drawdown is released, checking both that the claimed work is done and that the money left is enough to finish. Their certificate is what releases each build tranche. Valuations and the appraisal are prepared to professional standards, and the valuation bases used (market value, and where relevant a residual valuation of the site) follow the RICS Red Book framework, which is why an independent RICS valuation is a standard condition of a development facility.
The exit: how the facility gets repaid
Every development lender underwrites the exit, the event that repays the loan, as carefully as the build itself. A strong scheme with a weak exit plan will struggle to fund. There are two main routes.
Sale. The completed units are sold and the facility is redeemed from the proceeds, with individual unit sales often releasing the lender's charge one at a time. This is the cleanest exit for a build-to-sell developer.
Refinance. The developer keeps the units (build to rent, or hold and let) and moves onto longer-term borrowing, a buy-to-let or a commercial mortgage, once the scheme is complete and income-producing. A third, increasingly common option is development exit finance: a cheaper bridge that replaces the development loan at, or near, practical completion, at a lower monthly rate, releasing some trapped equity and buying a longer sales window so the developer is not forced to discount units to hit the development loan's end date. That product has its own mechanics; see our guide to development exit finance.
Whichever route applies, the lender wants it evidenced: comparable sales values for a sale exit, or a decision in principle and rental evidence for a refinance exit. Development finance is short-term money, so the question is never just "can it be built" but "and then how is it repaid".
Where development finance sits in the regulatory perimeter
A word on scope, because it governs what this guide can and cannot do. Development finance for a genuine business or investment purpose is unregulated lending: it falls outside the regulated-mortgage-contract and consumer-credit perimeters because it is commercial, not a loan to a consumer to buy their own home. That is why a developer, SPV or trading company can borrow against a scheme without the loan being a regulated mortgage.
Unregulated activity is not the same as unrestricted promotion. Under section 21 of the Financial Services and Markets Act 2000, inviting or inducing someone to enter into a credit agreement is a restricted financial promotion unless it is made or approved by an authorised person; the FCA's PERG 8 guidance explains where that line falls. This page is therefore educational. It explains how the product works, what drives the numbers and how it is taxed. It does not invite you to apply, quote for a facility, compare rates or arrange finance, and there is no finance capture anywhere on it.
One consumer fence is worth stating plainly. If any part of your borrowing would be secured on your own home, that is a regulated product outside the scope of this guide, and you should speak to an FCA-authorised mortgage adviser. Genuine development finance is secured on the scheme and taken by a business or investor, which keeps it on the commercial side of the line. For the market bodies that set standards in this sector, the Bridging & Development Lenders Association and UK Finance publish product definitions and market data, and government housing programmes are administered by Homes England.
The tax side: trading versus investment, work in progress and interest
The finance and the tax of a development are two separate questions, and the tax one is where the biggest surprises live. The threshold issue is whether you are carrying on a property development trade or holding a property investment, because it changes almost everything downstream: how the profit is taxed, whether losses are usable, and how the interest is treated.
This is a question of fact HMRC tests against your intention and conduct, not something you can simply elect. Build to sell for profit points to a trade; build (or buy) to hold and let points to investment. The distinction is set out on our trading versus investment income guide, which is the page to read before you assume how a scheme is taxed.
On the interest specifically, two points matter. First, for a genuine development trade, interest and the incidental costs of arranging the loan are generally allowable, but interest incurred while the units are being built may need to be carried in work in progress and matched to the accounting period in which the units are sold, rather than deducted as it accrues. That timing difference can be significant on a scheme that straddles two or three years. Second, the residential finance-cost restriction (Section 24), which limits interest relief for individual residential landlords, applies to residential letting, not to a development trade, so a developer's interest is not caught by it in the same way. The company loan-relationship rules apply where the developer is a company. HMRC's Business Income Manual, including its guidance on the incidental costs of loan finance, sets out the detail. Because the trading-or-investment call and the work-in-progress treatment turn on your specific facts, this is an area to take advice on rather than assume.
How development finance compares, and what it is not
To place the product, it helps to line it up against its neighbours, and to clear up one common confusion.
Against a bridging loan: a bridge is a single day-one advance against a standing asset for a short purpose; development finance is staged, sized against end value and cost, and built for construction. Our bridging loans guide covers where a bridge is the right tool, for example a fast purchase or a light refurbishment that does not need staged drawdowns.
Against a commercial mortgage: a commercial mortgage is long-term funding secured on a standing, income-producing commercial asset and repaid over years from rent or trading profit; development finance is short-term and repaid in one exit event. Many schemes use both in sequence, development finance to build, then a commercial mortgage as the refinance exit. See our commercial mortgages guide for that end of the journey.
Finally, the disambiguation the keyword set forces. This guide is about commercial funding for a specific UK property scheme. It is not about a development finance institution (a DFI), which is an entirely different thing: a government-backed body such as British International Investment that funds economic development in emerging markets. The phrase "housing development finance" can also be used for large corporate or public housing programmes. If you are funding a site to build or convert property in Britain, the product on this page is the one you want, not a DFI. For a quick orientation you can also read the shorter housing development finance primer, which this guide supersedes in depth.
Development finance is, at heart, a simple idea executed with discipline: money released in stages to build something, sized against what it will be worth and what it will cost, repaid when it sells. The discipline, the appraisal, the monitoring surveyor, the contingency, the evidenced exit, is what makes it work. And because the tax treatment of a development can move the after-tax return as much as the finance terms do, the sensible order is to get the scheme funded and the tax mapped before the first brick is laid.