How Property Development Finance Works | Property development finance is a type of funding used to build, convert, or refurbish properties. It helps developers cover land purchase and construction costs. This financing differs from standard mortgages because it is short-term and tailored to the project’s stages.

Understanding how development finance works is key if you’re planning to fund a ground-up build, renovation, or property conversion.  If you aim to invest in property development but lack substantial personal funds, viable financing options exist. One practical solution is development finance.  Development finance provides funding tailored to the construction, renovation, or expansion of properties. It offers flexibility to suit different project needs and development goals.

A common type is senior debt financing, in which banks lend to low-risk projects. This funding often covers costs like land purchases, construction expenses, and other related fees. Mezzanine financing is another development finance option. It uses investors’ equity to access additional funds, reducing reliance on personal borrowing.

Availability and terms of development finance vary depending on project size, location, and personal circumstances. Seeking advice from property finance experts can help identify suitable funding options for your project.

What Is Development Finance?

Development finance is a short- to medium-term funding option designed for property developers. It supports the purchase, construction, conversion, or major refurbishment of residential or commercial properties. Unlike a standard mortgage, it is project-specific and usually released in stages as the build progresses.

The loan is typically repaid through the sale or refinance of the completed asset. It can cover costs such as land acquisition and building works, making it suitable for new builds, commercial-to-residential conversions, or large-scale renovations.

When Is It Used?

You can use development finance for:

• New builds on vacant land
• Converting commercial buildings into residential units
• Splitting one house into multiple flats
• Major refurbishments of existing properties

Each project has different funding needs. Some developments require staged drawdowns. Others might need a single upfront loan. Choosing the right product depends on your project size and exit strategy.

How Does It Work?

The process typically involves:

• Initial application: You submit details of the project, planning permission, costings, and your experience.
• Valuation and approval: The lender reviews your plan and assesses the expected end value.
• Funds release: The lender provides the first tranche to buy the land or begin works.
• Staged drawdowns: More funds are released at key stages of construction, often after a site inspection
• .Repayment: The loan is repaid through the sale, or long-term refinance of the completed project.

Key Terms to Know

• Loan-to-Gross Development Value (LTGDV): The loan amount as a percentage of the projected end value
• Loan-to-Cost (LTC): The loan as a percentage of the total project cost
• Exit strategy: Your plan to repay the loan (e.g. sale, refinance, or rental)

Understanding these terms helps you prepare a strong application and speak confidently with lenders.

The Truth About Property Development Finance Rejections

Many aspiring property developers apply for development finance, but not every application is successful. In fact, up to 30% of cases are declined by lenders. While a rejection can be disappointing, understanding the reasons behind it is the first step to improving your chances of approval.

Contrary to popular belief, lenders are not looking for reasons to say no. They are in the business of approving viable projects. High rejection rates often reflect mismatched criteria or applications that lack the necessary detail and clarity.

To improve your chances of securing funding, your project overview must be complete, accurate, and professionally presented. Show that you are a reliable borrower and explain clearly how your property development fits the lender’s expectations.

It’s important to present a clear vision, including cost breakdowns, timelines, and exit strategy. A well-documented proposal demonstrates credibility and makes it easier for lenders to understand the potential of your project. For more guidance, visit our Property Development Finance page.

Benefits of Development Finance

• Access to larger funding than a traditional mortgage
• Flexibility with staged payments
• Short terms aligned with project timelines
• Can fund multiple phases, from acquisition to completion

It’s essential to have planning permission in place and accurate costings before applying. Lenders may also require a contingency budget.

Is It Right for You?

Development finance is ideal for experienced developers, landlords, or investors working on new builds, conversions, or large refurbishments. First-time developers may also qualify with a strong team and a well-planned project.

If you’re an adviser looking to support clients with property development, you can “Join our Mortgage network” to access lenders and receive specialist training.