Guide · 10 min read
How property development finance actually works: loan-to-GDV and loan-to-cost limits, day-one land advance, monitored drawdowns, interest roll-up and the exit.
Written by Matt Lenzie · Published 10 June 2026
Advice from
Matt Lenzie · 25+ year career banker (Bank of Scotland, Lloyds Banking Group). £300m+ raised for property clients.
25+ year career banker (Bank of Scotland, Lloyds Banking Group). £300m+ raised for property clients.
A development facility is the only loan most property investors will ever take where the security does not exist yet. The lender is advancing against a row of houses that is currently a muddy field with planning permission, which is why nothing about development finance works like a mortgage: the sizing runs off the end value, the money arrives in monthly tranches certified by the lender's own surveyor, the interest is rolled because there is no income to service it, and the credit decision is mostly a judgement about whether you and your contractor can deliver a building on budget. As of June 2026 senior development money prices at 7% to 11% a year, advances 60% to 65% of gross development value (GDV), and the sector's minimum viability test, profit on cost of 17.5% to 20%, kills more applications than credit history ever does.
This guide walks the full life of a facility in the order it actually happens: appraisal, credit, legals, drawdowns, completion and exit, with the costs itemised and a worked appraisal. For the product overview and current terms, see our development finance page; for how the end value itself is assessed, see the companion guide on gross development value.
Development finance funds the construction or substantial conversion of property: ground-up schemes, office-to-residential conversions under permitted development, barn conversions, airspace and major extensions. It is distinct from two neighbours it gets confused with. A standard bridging loan is a single advance against the current value of an existing property, with no works monitoring. A refurbishment bridge, light or heavy, funds works to an existing habitable or near-habitable building, usually releasing a works tranche or two against a schedule, and is the right tool for the buy-refurbish-refinance market via refurbishment finance.
The working rule of thumb at the desk in June 2026: when the cost of works passes roughly 25% to 30% of the property's value, refurbishment bridging pricing and monitoring start to strain, and when the works are structural, create new units, or approach the existing asset's value, the case is development finance whatever the borrower calls it. The label matters because it determines monitoring, pricing and which lenders will look at it at all.
Every facility is sized by three numbers, and the lowest output wins. Loan to GDV (LTGDV) caps the facility at 60% to 65% of the completed scheme's value. Loan to cost (LTC) caps it at 80% to 85% of total project cost, land included. And profit on cost, the projected profit as a percentage of all-in cost, must clear roughly 17.5% to 20% or the scheme is considered too fragile to fund regardless of the other two metrics, because the profit margin is the lender's real cushion against cost overruns and sales-price softness.
A worked appraisal for six houses in the Midlands, June 2026 numbers:
| Appraisal line | Amount |
|---|---|
| GDV (6 houses at £400,000) | £2,400,000 |
| Land purchase | £600,000 |
| Build cost including 5% contingency | £1,080,000 |
| Professional fees, CIL/s106, warranties | £110,000 |
| Finance costs (rolled interest and fees) | £185,000 |
| Total cost | £1,975,000 |
| Profit | £425,000 |
| Profit on cost | 21.5% |
Sizing: 65% of GDV is £1,560,000; 85% of cost is £1,678,750. The GDV cap binds, so the facility is £1.56m and the developer funds about £415,000 of equity. Of the facility, a day-one land advance of typically 50% to 65% of the land value (here, £300,000 to £390,000) is released at completion of the purchase, with the balance reserved for the build and drawn monthly. Run your own scheme through our development finance calculator to see which cap binds and what equity is required.
The decision-in-principle stage produces indicative terms quickly; the real underwriting happens at credit committee, and it tests four things in a fairly fixed order. First, the exit: can the units actually sell at the appraised prices in the appraised timeframe, or refinance onto term debt if held. Second, the cost plan: is the build cost per square foot credible against current tender prices (as of mid 2026, mainstream two-storey housing tenders broadly £1,650 to £2,100 per square metre in the regions, materially more in London, with BEIS/DBT materials indices still above their pre-2021 trend). Third, the team: contractor accounts, professional appointments, and who carries design risk. Fourth, the sponsor: experience, liquidity for overruns, and credit conduct.
Experience is weighted more heavily than any single financial metric. A developer on scheme five with two delivered comparables gets 65% LTGDV and the keen end of the rate range; the same scheme from a first-timer gets 55% to 60%, a point or two more on rate, and a required main contractor with a fixed-price contract. Lenders are not pricing the bricks, they are pricing the probability the bricks arrive on time and on budget.
Between credit approval and first drawdown sits the conditions precedent (CP) list, and it is where timelines die. The standard senior CP set in 2026: satisfactory planning permission with conditions discharged or dischargeable, a signed fixed-price build contract (JCT or equivalent) with collateral warranties from the contractor and design team in the lender's favour, a structural warranty provider engaged (NHBC, LABC, Premier or similar), evidence of the developer's equity, debenture and legal charge over the site, often a charge over the SPV's shares, and personal guarantees, typically capped at 20% to 25% of the facility, occasionally accompanied by an uncapped but narrow cost-overrun guarantee. Allow three to five weeks from credit approval to land drawdown with responsive solicitors, longer if warranties or planning conditions are loose ends. The single most effective acceleration is instructing a solicitor who does development work weekly, not annually.
Once the land advance is out, the build facility is drawn monthly in arrears. The rhythm: the contractor values the month's completed work, the lender's monitoring surveyor (MS) visits site, and the MS report goes to the lender, who releases the tranche, normally five to ten working days after the visit. "In arrears" is load-bearing: the developer or contractor finances each month's work first and is reimbursed after certification, so a scheme can be fully credit-approved and still hit a working-capital wall if the contractor's payment terms are shorter than the drawdown cycle.
The MS report is not a formality. It covers: value of work properly executed against the cost plan, the remaining cost to complete versus the undrawn facility (the "cost to complete" test, the lender's core protection), programme position against the build schedule, variations and their funding source, health-and-safety and insurance compliance, and a recommendation on the certified release. If cost to complete exceeds the undrawn facility, the lender pauses drawdowns until the developer injects the shortfall. That mechanism, not repossession, is how development lenders actually manage trouble, and it is why the contingency line in the appraisal is examined so closely at credit stage.
Development facilities run 12 to 24 months and the interest rolls up, so the debt is at its maximum on the day the income starts. The exit options, in the order lenders prefer them: unit sales, with the lender releasing each plot from its charge against an agreed minimum release price, typically 85% to 95% of the net sale proceeds applied to the loan; a development exit facility, cheaper bridging that refinances the development loan at practical completion and buys 6 to 12 months of unpressured sales time at a lower rate; or hold and refinance, moving completed units onto term debt, a portfolio buy-to-let facility or a bridge-to-let structure where the units are being retained. Credit committees underwrite the exit on day one, and a scheme with a plausible dual exit, sell or hold, borrows better than one with a single route.
| Cost line | Typical range, June 2026 | When paid |
|---|---|---|
| Interest, rolled up | 7% to 11% pa on drawn balance | At redemption |
| Arrangement fee | 1% to 2% of facility | Deducted at first drawdown |
| Exit fee (some lenders) | 1% to 2% of loan, occasionally of GDV | At redemption |
| Monitoring surveyor, initial report | £1,500 to £3,000 | Pre-drawdown |
| Monitoring surveyor, monthly visits | £750 to £1,500 per visit | Monthly |
| Development valuation | £2,000 to £6,000 | Pre-credit |
| Legals, both sides | £10,000 to £25,000+ | At drawdown |
Two pricing notes. Interest is charged on the drawn balance, not the facility limit, so a well-sequenced drawdown profile genuinely saves money; the £185,000 finance line in the appraisal above assumes an average drawn balance of roughly 60% of peak. And an exit fee quoted "on GDV" rather than on the loan is materially more expensive than it looks: 1% of a £2.4m GDV is £24,000 against £15,600 on the loan, a 54% uplift hidden in one word of the term sheet.
Most lenders' stated minimum is "relevant experience", and the honest translation is that a first ground-up scheme gets funded when the rest of the file compensates. The reliable path we see work: two or three heavy refurbishments or single-unit conversions funded on refurbishment bridging, documented with before-and-after valuations and final accounts; then a small first development, two to four units rather than twelve, with an experienced main contractor on a fixed-price JCT contract, a full professional team, 25% to 30% equity instead of 15%, and a capped PG you can actually stand behind. Presented that way, scheme one is fundable at 55% to 60% LTGDV from a meaningful pool of lenders. Presented as "I have watched a lot of property programmes and own two buy-to-lets", it is not. The track record you build on small projects is collateral, treat it that way and keep the evidence.
Development finance is a staged facility for building or substantially converting property, sized against the gross development value (GDV) of the completed scheme and the total cost of delivering it, and drawn down in monthly tranches against a monitoring surveyor's certification. A bridging loan is a single advance against a property's current value. As a working rule in June 2026, if the works cost more than about 25% to 30% of the property's value the case is moving out of refurbishment bridging territory and into development finance.
As of June 2026 senior development lenders typically cap facilities at 60% to 65% of GDV and 80% to 85% of total project cost, whichever produces the lower figure, and expect projected profit on cost of at least 17.5% to 20%. On a scheme with a £2.4m GDV and £1.975m total cost, 65% of GDV gives £1.56m and 85% of cost gives about £1.68m, so the GDV cap binds and the facility is £1.56m, leaving the developer to fund roughly £415,000 of equity.
After the day-one land advance, the facility is drawn monthly in arrears. The contractor completes a month of work, the lender's monitoring surveyor inspects, certifies the value of work properly done and confirms the remaining facility is still sufficient to complete the build, and the lender releases that month's tranche, typically within 5 to 10 working days of the visit. The developer or contractor finances each month's work before being reimbursed, which is why working capital matters even on a fully credit-approved facility.
As of June 2026 a typical senior facility prices at 7% to 11% a year, rolled up rather than serviced, with a 1% to 2% arrangement fee, an exit fee of 1% to 2% on some facilities (charged on the loan or occasionally on GDV), monitoring surveyor fees of roughly £750 to £1,500 per monthly visit plus £1,500 to £3,000 for the initial appraisal report, a development valuation of £2,000 to £6,000, and both sides' legal costs. On an 18-month, £1.5m facility the all-in finance line commonly lands between £180,000 and £230,000.
Almost always, but rarely for the full debt. The standard ask from senior development lenders in June 2026 is a personal guarantee capped at 20% to 25% of the facility, sometimes with an additional cost-overrun and interest-shortfall guarantee that is uncapped but narrow in scope. The guarantee is there to keep the developer at the table if the scheme stalls, not to make the lender whole, and guarantee levels are negotiable where the developer's equity and track record are strong.
Yes, but not on standard terms and rarely straight to a ground-up multi-unit scheme. First-scheme developers in 2026 typically get funded by stepping up through heavy refurbishment and single-unit conversions financed on refurbishment bridging, building a documented track record, then presenting the first true development with an experienced main contractor under a fixed-price JCT contract, a named professional team, and more equity, often 25% to 30% of cost rather than 15%. Lenders fund the team as much as the individual.
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