Development Finance

Whether you’re an experienced developer or taking your first steps into the world of property, development finance is an important consideration. Financing your property development appropriately will be crucial to the success of your project, so you should research carefully and explore all of the options before getting underway.

What is property development finance?

Few developers start and complete a project using only their own money; as with other property purchases, most developers will place a deposit and make up the required amount with development finance. These funds can be used to purchase land or property, to complete the project, and to pay contractors or suppliers.

Unlike a residential property mortgage, in which funds are released all on the same day, development finance is typically released in stages or ‘tranches’, to be drawn down as the project progresses and facilitate cash flow throughout the life of the development.

What are the different types of property development finance?

Mortgages for property development are varied and complex, and the nature of the development finance you require depends on your project, and what you’re looking to achieve.

Senior debt: The first charge loan over a development project is referred to as senior debt development finance; in most circumstances, senior debt is the cheapest and most straightforward form of project funding. It can typically be used to finance up to 65% of the gross development value (GDV) or 90% of project costs, although this will vary depending on your circumstances, your project, your experience, and the lender you work with.

Senior debt can be used for an array of development projects. Residential developments are often the most straightforward, and the majority of lenders will be amenable to such projects. However, senior debt can also be used for projects as varied as commercial developments, industrial developments, student accommodation blocks and more.

A broad range of lenders offer senior debt development finance. From mainstream banks to specialists, lending will vary hugely in terms of cost, availability, and terms. Understandably, having more experience in property development makes it easier to access a wider range of senior debt development finance lenders. However, there are a number of lenders willing to offer senior debt development finance to first time or less experienced developers.

Stretched senior debt: Beyond senior debt, ‘stretched’ senior debt is a finance product that can extend to a higher loan to cost (LTC) or loan to value (LTV) than standard senior debt. Because of the increased exposure, this is usually only available for more experienced developers. Stretched senior debt provides up to 75% of the gross development value (GDV) or a project, or 90% of the total project costs.

Stretched senior debt can be particularly useful for developers who have more than one project running concurrently. With multiple developments underway, liquidity can be limited – so senior stretched debt creates some flexibility. This can often be preferable to mezzanine finance: with stretched senior finance, a single lender can provide the entire loan – rather than doubling up on lenders, complexity, and potentially fees.

Stretched senior finance generally requires planning consent to have been granted in advance, and lenders will have preferences about the type of scheme they are happy to offer stretched senior finance against. Articus Finance brokers have a deep understanding of development lender criteria, and can advise you accordingly.

Who can apply for development finance?

The profile of a property developer varies from very experienced developers to those just beginning their journey. But in any case, to give your application the best chance of success, there are a number of factors to consider ahead of time. For example, development finance lenders will require you to have detailed planning consent already in place, with contracts agreed, a clear project plan, and a view on how you expect to repay the loan.

As for lenders, the development finance lender landscape has become much more varied in recent years. At Articus, we work with institutions across the market offering mortgages for property development, from high street banks to specialists. However, despite the growing choice in development lenders, this world is still best navigated with the help of an expert to ensure the best outcomes.

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