Development Finance for UK Property Schemes: How the Drawdown Works

Development finance is a staged facility secured on a property scheme, drawn in tranches as the build progresses rather than paid over as one lump. That sentence contains the whole product, and almost every misunderstanding about property development finance comes from skipping past it.

Ask most people what a development loan is and they describe a big mortgage for building things. It is not that. A development finance lender does not give you the money. It commits to give you the money in pieces, and each piece is released only after somebody the lender appoints has stood on your site and certified that the work you say you have done is actually done. The cash follows the concrete. That is the drawdown, and once you hold it in your head, the rate, the fees, the loan to gross development value cap and the cash flow modelling all stop being arbitrary and start being consequences.

Everything below follows from that one mechanic. Both types of scheme we see most often, residential development finance for housing and commercial development finance for offices, industrial and retail, run on the same staged logic, and so does the funding that sits on top of it.

What is meant by property development finance?

Property development finance is short-term secured lending that funds the acquisition of a site and the cost of building on it, repaid from the sale or refinance of the finished units. It is a business facility for a business purpose, and it is priced and structured on the scheme rather than on the borrower’s salary. Development loans of this kind are unregulated commercial lending in almost every case, because the property is being built to sell or to let rather than to live in.

Three things separate it from every other kind of property finance. It funds work that has not happened yet. It advances money against a value that does not exist yet. And it releases that money conditionally, in stages, rather than unconditionally on day one. No other property development lending product does all three.

The security is a first legal charge over the site, usually held in a special purpose vehicle set up for that one property. The exit is the event that clears the loan: unit sales, or a refinance onto term debt if you are holding. Development funding is always short dated, typically running the length of the build programme plus a sales window, because the development finance lender is pricing construction risk and wants out the moment that risk is gone.

It is also worth saying what property development finance is not. It is not a business loan against your company’s trading position, and it is not a commercial mortgage against a standing asset. A commercial mortgage is underwritten on rental income from a finished building. Development finance is underwritten on a building that does not exist, which is why the two products price so differently and why the drawdown mechanism exists at all.

How does a development loan release money against certified progress?

Here is the mechanic in order, because the sequence is the thing.

At legal completion the lender advances the land tranche. This is the one lump you do receive, and it is usually capped at somewhere around half to two thirds of the site value, with your equity making up the balance. You buy the site. Nothing else is drawn.

You then build using your own working capital for the first phase, or against an agreed initial drawdown. When you have put value into the ground, you request a drawdown. The lender instructs its monitoring surveyor, who visits, measures what has been completed against the agreed cost plan, and certifies a figure. The lender releases against that certificate, usually within a few working days.

You repeat that cycle every month or so through the build. Money arrives behind the work, never in front of it. The final tranche lands at practical completion, and interest is settled when the scheme sells or refinances.

Two consequences fall straight out of this. The first is that you carry the cash flow gap between doing the work and being paid for it, which is why underfunded developers stall at month four rather than month one. The second is that your interest bill is calculated on the drawn balance, not the facility size, so a scheme built efficiently costs materially less than a scheme built slowly on the same headline rate.

What sits inside a residential development finance facility?

A residential development finance facility is not one number. It is three, and they behave differently.

The land element funds the property purchase and is drawn in full at completion. The build element funds construction and is drawn in stages against certification. The interest element is the lender’s own money, set aside inside the facility to pay itself while you build. Commercial development finance is assembled the same way, with a longer letting or sales assumption at the end of it.

That third piece is the one first time developers miss. On most residential development finance deals the interest is rolled up rather than serviced monthly, because a half built scheme produces no income to service anything from. The lender adds the interest to the balance and takes it all at the end. This is a genuine convenience and it is also why the loan you repay is bigger than the loan you drew.

There is a fee element too, and it sits inside the same facility. Arrangement fees, the monitoring surveyor’s cost, valuation and both sets of legal costs are typically capitalised rather than paid in cash.

Add those four together and you get the gross facility. Compare that gross figure against the gross development value and you get LTGDV, the ratio that actually sizes a residential development finance deal. Across our lender panel senior debt runs up to 65 to 70 percent LTGDV, and every pound above that has to come from your equity or from a second layer of capital.

This is where residential development finance quietly diverges from the way most people budget a scheme. Developers think in cost. Lenders think in finished value. You can build a property scheme for £1,500,000 and still be told the maximum facility is £1,300,000, not because the costs are wrong but because the finance is sized off the end value and nothing else.

Who signs off the build before the next tranche of funding lands?

The monitoring surveyor, and this appointment deserves more attention than developers usually give it.

The monitoring surveyor is a quantity surveyor instructed by the lender, paid for by you, reporting to the lender. Before drawdown they review your cost plan, your programme, your contractor and your contingency, and they tell the lender whether the scheme can realistically be built for the money. During the build they visit at each drawdown, value the work in place, and certify what should be released.

They are not there to help you. They are there to protect the lender from a scheme that is running over. But a good one is the closest thing to an early warning system a developer gets, because a surveyor who flags a cost overrun at month three has handed you nine months to fix it.

What they will not certify matters as much as what they will. Materials sitting on site unfixed are usually valued at a discount or not at all. Work done off site is treated cautiously. Anything outside the agreed specification is a variation, and variations slow certification down. Keep the build inside the plan the surveyor signed off and the funding arrives predictably.

Can you get 100 percent development funding?

Not as senior debt, and anyone who tells you otherwise is describing something else.

Senior lending is capped by LTGDV, which means the gross facility cannot exceed 65 to 70 percent of the finished value of the scheme on our lender panel. On a scheme with a gross development value of £2,000,000 that is a ceiling of £1,300,000 to £1,400,000. If total costs including land, build, fees and rolled up interest come to £1,650,000, you are finding £250,000 to £350,000 yourself.

You can, however, get close to 100 percent of cost through layering. Mezzanine sits behind the senior lender in a second charge and stretches the total to 85 to 90 percent LTGDV, at around 12 percent a year, which reduces your equity requirement to roughly 10 to 15 percent of gross development value. An equity or joint venture partner can take you closer still, at the price of 40 to 60 percent of the profit.

So the honest answer is that 100 percent development funding exists as a structure and does not exist as a product. What you are choosing is which capital you would rather give up: cash, interest, or profit share.

One more thing to be careful about. Advertisements offering 100 percent development finance usually mean 100 percent of build cost with the land already owned and unencumbered, which is a very different proposition from 100 percent of everything. If you own the site outright, your equity is already in the deal as land value, and the finance simply meets the construction spend. That is a real structure and it is worth knowing the difference before you take a headline at face value. It applies to a care home or a commercial unit exactly as it does to housing.

What does property development lending actually cost?

Take the running costs one at a time, because the headline rate is a minority of the total.

Interest starts from 6.5 percent a year across our lender panel and rises with risk, and it is charged on the drawn balance only. That structure alone is worth several thousand pounds on a mid sized scheme against a facility charged on the full commitment. For reference, the Bank of England base rate has stood at 3.75 percent since December 2025, and development margins are quoted over a lender’s own cost of funds rather than tracking base rate directly.

The arrangement fee is charged on the facility and paid at drawdown, usually by deduction. An exit fee may apply, sometimes on the loan and sometimes on gross development value, and the difference between those two bases is worth reading carefully because it can be several times the money.

Then the professional costs: a valuation, an initial monitoring surveyor appraisal, a fee for every subsequent site visit, your legal costs, and the lender’s legal costs.

Work a small scheme through. Six houses, land at £600,000, build at £900,000, gross development value of £2,000,000. Total build and land cost is £1,500,000. Add roughly £45,000 of rolled up interest over an 18 month term at the bottom of the range, plus fees, and the gross facility approaches £1,600,000. That is 80 percent of gross development value, above senior debt on its own, so this scheme needs either more equity or a mezzanine layer. Finding that out now is free. Finding it out at month eight is not.

Every figure here is indicative, none of it is an offer of finance, and the same property scheme priced across a panel of over 100 lenders will come back with a genuinely wide spread. That spread is the single strongest argument for shopping a development finance case properly rather than taking the first term sheet, because two lenders looking at identical residential development finance paperwork in the same week routinely differ by more than a percentage point of margin and a full point of arrangement fee.

Which types of scheme suit development lending rather than a bridging loan?

The dividing line is whether the work needs staged certification.

Ground up construction is squarely development lending. So is a conversion with structural change, a demolition and rebuild, and a change of use scheme where the finished units are materially different from what you bought. Residential terraces, small apartment blocks, mixed use with commercial at ground floor, care homes and student accommodation all sit here, and a care home scheme in particular tends to need the longest facility because the operator has to be in place before the property has any value as an income asset. Commercial ground up projects and commercial to residential conversions do too.

Bridging loans do a different job. A bridging loan is a lump sum against an exit, and it suits site acquisition ahead of planning, a light refurbishment with no structural change, or a fast purchase where you need to complete before development finance can be arranged. Plenty of developers use both types of facility in sequence: bridging to secure the property, then a development finance facility once planning lands. Refurbishment finance sits between the two, and heavy refurbishment behaves like development finance because it also draws in stages.

The practical test is simple. If the money has to arrive in pieces against certified work, you need development finance. If it can arrive once and sit there, bridging loans are cheaper to arrange and faster to close. Getting that call wrong is expensive in both directions: a bridging loan on a build programme runs out of term, and a development facility on a simple purchase pays for monitoring nobody needed.

What does our development finance team need before it can quote?

The quality of your pack decides your terms more than anything else in the process, so bring the following.

The site, with title, planning consent and any conditions still to discharge. A lender cannot size a facility against a consent it has not seen.

The costs, in a proper cost plan rather than a builder’s summary, with a contingency inside it. Ten percent is the number lenders expect on a straightforward residential scheme and more on anything with groundworks risk. A cost plan with no contingency reads as a cost plan that has not been thought about.

The value, evidenced. Your gross development value will be tested against comparable sales, and lenders discount optimistic figures rather than argue about them. Land Registry sold prices for genuinely comparable units on genuinely comparable streets are the strongest evidence you can bring, and a scheme valued £1,900,000 on evidence beats one valued £2,200,000 on hope.

The team, named. Contractor, contract type, architect, and who is running the site day to day.

The exit, with a date attached. Sales, refinance, or a mix, and what happens if the market is slow when you finish.

The track record, or what stands in its place. A first scheme is fundable, but the contractor and the professional team have to carry the experience the developer does not have yet.

The borrowing entity, with its structure behind it. Most residential development finance is written to a special purpose company with personal guarantees from the directors, and our development finance team will ask about your wider business position because a lender will.

Get that together and the process is unremarkable. Arrive without a cost plan and no amount of enthusiasm will meet the standard a credit committee applies. Developers who meet that bar on the first submission tend to get a decision in weeks. Developers who do not tend to spend those weeks assembling the pack anyway, just with a live purchase deadline running against them.

If you want a view on a specific site, we arrange development funding across a panel of over 100 lenders, and we will tell you when a scheme does not stack. Where the senior facility leaves a gap, mezzanine finance fills it. Where a completed scheme still has units to sell, development exit finance buys back the sales window. Where the job is acquisition rather than construction, look at bridging loans.

Construction Capital is a trading name of Lenzie Consulting Ltd, registered in England and Wales, company number 08174104. We are a commercial finance broker and introducer, not a lender, and we are not authorised by the FCA. Rates and terms are indicative, vary by lender and deal, and are never an offer of finance. Written by Matt Lenzie.