For a new property developer, few things are more exciting than taking a piece of land or a tired building and transforming it into something new. But no matter how good your idea, progress stops without the right funding. Development finance is the solution. It is not a standard mortgage. Instead, it is a loan designed specifically to match the stages of a building project, from buying the site through to selling or refinancing the finished homes.
This guide has been written for new and learning developers. It will walk you through the basics of development finance, the different types available, the application process and what to expect along the way. By the end, you will understand the essentials and feel confident in approaching a specialist lender like BLG.
Who is Development Finance For?
Development finance is not just for big developers. It is a flexible product designed for:
- First-time developers starting with a small project such as a single house or flat conversion.
- SME house builders taking on local schemes.
- Landlords looking to expand into refurbishment or small new-build projects.
High street banks sometimes provide funding, but they usually lack the speed and understanding needed for property development. A specialist lender like BLG works differently. We understand the challenges that come with planning, construction and sales. Our role is to provide funding and act as a supportive partner throughout your project.
Key Terms Explained in Simple Language
The world of development finance has its own vocabulary. Here are the main terms you will come across:
- Gross Development Value (GDV): The total value of your project when finished and ready for sale.
- Loan to Gross Development Value (LTGDV): The percentage of the GDV a lender is prepared to fund. For example, if the GDV is £2 million and the loan is £1.3 million, the LTGDV is 65%.
- Loan to Cost (LTC): The percentage of your total costs that a lender will cover.
- Interest roll-up: Instead of paying interest every month, the interest is added to the loan and paid at the end when the project is sold or refinanced.
- Drawdowns: The staged release of funds as the project moves forward.
- Exit strategy: How you plan to repay the loan. Most developers either sell the finished properties or refinance them onto long-term mortgages.
Understanding these terms will help you follow the process and speak confidently with lenders.
The Main Types of Development Finance
There are several forms of development finance. Each suits different situations.
Senior Debt
This is the most common type of loan. Senior debt development finance covers the bulk of project costs and usually allows borrowing up to around 65% of GDV. Because it carries the lowest risk for the lender, it also has the most competitive interest rates.
Mezzanine Finance
This is a smaller, secondary loan that sits on top of senior debt. It can reduce how much of your own money you need to put in. Mezzanine development finance is more expensive than senior debt, so it is often used carefully.
Stretch Senior Debt
This sits between senior debt and mezzanine finance. Stretch senior debt allows you to borrow slightly more, sometimes up to 75–80% of GDV, without arranging two separate loans.
Joint Venture Finance
Instead of a loan, you partner with an investor who provides funding in exchange for a share of the profits. This can be useful if you have the skills but limited funds.
Bridging Finance
Bridging finance is a short-term loan, often used to buy a site quickly at auction or to cover small refurbishment works. Development exit finance is a type of bridging loan that gives you extra time to sell once construction is complete.
The Development Finance Process
Securing development finance means following a clear and structured path.
Step 1: Preparing Your Application
Think of your application as a business plan. The more detail you provide, the more confidence a lender will have. You will need:
- A detailed development appraisal showing costs, revenues, and a contingency
- Full project details, including drawings and planning permission
- A realistic GDV backed up by evidence from local estate agents
- Information about your project team
- A short CV of your experience, even if limited
- A statement of your assets and liabilities
The lender will also carry out their own checks, including a valuation of the site.
Step 2: Receiving a Loan Offer
If the project is viable, the lender will issue a loan offer. This will include the interest rate, fees, and conditions that must be met before funds are released.
Step 3: Project Monitoring
Once the offer is accepted, the lender appoints an independent monitor or quantity surveyor. Their role is to check the project is progressing as planned. This protects both you and the lender.
Step 4: Drawdowns
Funds are released in stages. For example, the first drawdown may cover the site purchase. Later drawdowns might cover foundations, the watertight structure, and final finishes. Each stage is verified before the funds are released.
Step 5: Exit Strategy
When the project is complete, you repay the loan. This is usually through sales of the finished homes or by refinancing onto a longer-term mortgage.
Common Questions for New Developers
Do I need experience to get development finance?
Not always. Many lenders will work with new developers, especially if you have a strong professional team around you.
How much of my own money do I need?
Most lenders expect you to contribute some equity. This could be as low as 10–20% of total project costs.
What happens if my costs overrun?
Lenders usually require a contingency fund within your appraisal. If costs rise beyond this, you may need to inject extra funds yourself.
Glossary of Helpful Terms
- Contingency: Extra funds set aside for unexpected costs.
- Cost overrun: When actual costs are higher than budgeted.
- First charge: The lender’s legal right over the property. They are repaid first if the property is sold.
- JCT contract: A standard building contract setting out responsibilities during construction.
- Practical completion: The stage where a project is considered finished and ready for use or sale.
- Professional indemnity insurance: Insurance that protects against errors by your professional team.
- RICS: The professional body for surveyors who provide valuations.
To learn more key terms you’ll likely encounter and find out their definitions, visit our development finance glossary.
Why Choose a Specialist Lender?
Choosing the right funding partner is one of the most important decisions you will make. A specialist lender like BLG does more than provide money. We become part of your professional team, offering guidance and flexibility throughout your project. Your success is our success.
If you are ready to discuss your first project, speak to the BLG team today.