Property development funding works differently from other loans and mortgages – instead of receiving all your money at once, your finance comes in stages.
These staged payments keep your project on track while protecting both you and your lender. Here’s how it works.
What Development Loans Do and How They Work
Whether you’re building from the ground up, converting an existing building, or undertaking a major renovation, property development loans provide the funding you need throughout your project’s lifecycle.
Unlike mortgages or standard loans, development finance adapts to your project’s changing needs. Think of it as a partnership between you and the lender – they’re investing in your vision, but releasing money gradually as your project progresses and value increases.
A typical development loan combines two key elements:
- funding to buy the site or property
- plus money for the actual construction work
You might borrow £2 million to purchase a prime London site, then draw down an additional £3 million during construction to create luxury apartments worth £7 million on completion.
The amount you can borrow depends on both your current position and future plans.
Most lenders look at three main figures: the site’s current value, your build costs, and the expected value once complete (the Gross Development Value or GDV).
They’ll typically offer up to 70% of the current value, plus up to 100% of your build costs, while keeping the total loan below 75% of GDV.
High-end projects often benefit from more flexible terms.
If you’re planning a prime residential scheme or mixed-use development, specialist lenders might stretch to 80-85% of GDV. Some offer 100% funding for construction costs when you already own the site – particularly valuable for larger-scale developments.
These loans typically last up to 36 months, giving you time to complete construction and either sell or refinance. Interest rates reflect the lender’s additional risk, but you’ll only pay interest on the money you’ve actually drawn down.
Understanding the Initial Release of Funds
Using ground-up development finance, the first payment helps you secure your site.
Most lenders advance between 65-70% of the current site value upfront, but remember – this is your net loan, meaning the lender has already taken out their arrangement fees and initial interest charges.
This situation is quite common with short-term development loans and bridging loans.
Let’s look at a real example:
Say you’re buying a site valued at £2 million. At 70% loan-to-value, that’s £1.4 million. After deducting a 2% arrangement fee (£28,000) and initial interest, your actual day-one payment might be closer to £1.35 million.
For higher-value projects, you might access more upfront through additional security or combining senior debt with mezzanine finance. Remember though – higher leverage typically means higher costs.
explore ground-up financeThe Structure of Development Finance Staged Payments
Property development funding breaks down into three parts:
- First, there’s your site purchase money.
- Then comes your construction funding, released as you build.
- Finally, there’s the interest and fees component – usually either deducted upfront or added to your loan balance.
Many lenders can offer up to 100% of build costs (Loan to Cost – LTC), particularly if you already own the site or have substantial equity. For example, on a £5 million project where you own the land, you could access the entire construction budget through development finance.
However, most lenders cap the total loan (including both land and construction) at around 75% of your project’s final value (Gross Development Value). Some specialist lenders might stretch to 80-85% GDV for the right project.
Payment releases align with specific building milestones. Each stage needs sign-off/approval before you get your next round of funding. This keeps quality high and risks low throughout your build.
Working with Surveyors
Every payment release needs professional verification.
That’s where monitoring surveyors come in. You’ll work with either an Independent Monitoring Surveyor (IMS) or a Quantity Surveyor (QS).
An IMS checks your site regularly, making sure work quality matches the plans and costs stay on track. They’re thorough – they’ll review everything from foundation depths to finishing details before approving your next payment.
Some lenders, especially for larger projects, prefer Quantity Surveyors.
A QS focuses more on the numbers, tracking costs against valuations and helping keep your project financially sound.
Managing Money Through Your Build
Smart cash flow management makes the difference between a smooth project and a stressed one.
You need more than rough estimates – you need detailed planning.
Your spending won’t be even throughout the build. You might need £250,000 one month for groundworks, then just £100,000 the next for basic construction.
Yet many lenders prefer releasing equal monthly amounts.
This mismatch can cause headaches.
Plan for intensive phases like foundations, roofing, and services installation. Consider negotiating flexible payment terms with contractors or keeping a cash buffer for high-spending periods.
How Payment Stages Work
Once you have acquired the site, early stage payments cover groundwork and foundations.
You’ll need to show completed site preparation, foundation laying, and initial services before getting your next payment. Photos and detailed records speed up the inspection process.
Mid-build payments typically link to structural completion – think walls up, roof on, windows in. This is when your project really takes shape, becomes weather-proof and value starts building.
Final stage funding covers internal works and finishing touches. From plastering to power points, flooring to final fixes – each element needs sign-off.
Payment Amounts and Release Schedule
Here’s how your funding might get released throughout the project:
Initial Purchase Release (Day One)
- Up to 70% of the site value (net)
- Example: On a £2m site, you might receive £1.4m minus fees
- Released once legal work completes
Build Phase Releases
If you’ve secured 100% LTC funding, here’s how the construction budget could break down:
Foundation and Groundwork Stage: 20-25% of build costs
- Released after site prep and foundation completion
- Typically 4-8 weeks into the project
- Example: On a £1m build budget, expect £200,000-£250,000
Shell Construction: 25-30% of build costs
- Released when structure reaches water-tight stage
- Usually includes walls, roof, and windows
- Often around week 12-16
- Typical release: £250,000-£300,000 on a £1m build
First Fix Stage: 20-25% of build costs
- Covers internal walls, electrical, plumbing rough-ins
- Usually weeks 16-20
- Release around £200,000-£250,000 on £1m build
Second Fix and Completion: Remaining 25-30%
- Released in smaller amounts during final stages
- Covers finishes, decorating, external works
- Final release after completion certificate
Most lenders release funds within 24-48 hours of surveyor sign-off. Factor this timeline into your contractor payment schedules.
For 100% LTC deals, you’ll need to demonstrate:
- Strong track record in similar projects
- Clear exit strategy
- Robust contingency planning
- Detailed cost breakdowns
- Experienced professional team
Making Payments Work Smoothly
Documentation and organisation drives everything. Keep really good records of:
- Building certificates
- Cost receipts
- Progress photos
- Contractor invoices
Talk to your lender regularly. Share progress updates, flag potential delays early, mention spec changes. Good communication can mean faster payments.
Planning Your Exit
Most developers focus heavily on construction phases with less time on exit planning.
Yet your exit strategy directly affects your borrowing costs and project profits.
Smart developers start planning their exit from day one, but you’ll need to ramp up activities as you approach completion.
Selling Your Development
If you’re planning to sell, start marketing at least three months before completion. For high-value developments, consider:
- Early appointments with premium estate agents
- Pre-completion marketing to build interest
- Show home or show apartment preparation
- Professional staging and photography
- Building a list of potential buyers through your agent
Moving to Long-term Finance
For retained units or commercial developments, you’ll need to switch to long-term funding.
Different properties need different approaches:
Buy-to-Let Portfolio Mortgages
Perfect for multiple residential units. You’ll need to show:
- Projected rental income
- Property valuations
- Your track record as a landlord
- Portfolio business plan
Commercial Mortgages
Ideal for retail, office, or mixed-use developments. Lenders assess:
- Tenant quality and lease terms
- Commercial property value
- Rental yields
- Location and market demand
Start mortgage applications 2-3 months before development completion. Remember, commercial mortgages take longer to arrange than development finance.
Development Exit Finance
Sometimes you need more time than your original development loan allows. Development exit finance offers a smart solution, offering:
- Lower interest rates than your development loan
- Terms from 3-24 months
- Up to 75% LTV on completed value
- Interest-only payments/Roll-up
- Flexibility to sell units individually
This option works well when:
- You want more time to achieve better sales prices
- The market needs longer to strengthen
- You’re waiting for commercial tenants
- Your long-term financing isn’t quite ready
Remember – once you’ve drawn down all development finance stages, you’re paying interest on the full amount. Having your exit strategy ready to go keeps costs down and protects your profit margins.
Want to discuss your property development plans?
Get in touch – we’ll help you find the right funding solution.
