What is Development Finance?
If you are new to development finance, here is a quick explanation of what development finance is and how it works.
Development finance is a short-term funding solution, typically available for 6 to 24 months, designed to support residential and commercial development projects. It helps cover both purchase costs and build costs, making it a vital option for developers working on new builds, conversions, or refurbishments—from single-unit projects to large-scale, multiphase developments.
How Does Development Finance Work?
A development loan is typically structured in two key stages:
1. Site Purchase – The initial portion of the loan is used to assist with acquiring the development site. This could be land for new builds or an existing property in need of refurbishment or conversion.
2. Build Costs – The second stage of funding covers construction and renovation expenses. Rather than being released in full at the outset, funds are typically drawn down in stages as the project progresses. These staged payments, often made monthly, are based on completed work and verified through site inspections.
Key Considerations for Lenders
When assessing a development finance application, lenders focus on several factors:
• Project Viability – Lenders review the development’s potential profitability, considering market demand, projected sales or rental values, and build costs.
• Experience of the Developer – While first-time developers can secure funding, those with a proven track record of successful projects are often viewed more favourably.
• Exit Strategy – A clear plan for repaying the loan is crucial. This could be through selling completed units, refinancing onto a long-term mortgage, or a combination of both.
• Loan-to-Gross Development Value (LTGDV) – Lenders typically provide funding based on a percentage of the project’s expected final value, usually up to 65-75% of the GDV.
• Who Can Benefit from Development Finance?
• Development finance is commonly used by property developers, investors, and builders who need access to flexible, structured funding. It is ideal for those looking to acquire land, refurbish existing properties, or undertake large-scale construction projects that may not qualify for standard mortgage financing.
By providing staged funding and tailored repayment structures, development finance ensures that capital is available as needed, helping developers manage cash flow effectively while bringing projects to completion.