Glossary · UK
What is Development Finance?
A short-term loan used to fund the construction or major renovation of a property, released to the borrower in stages as building work progresses, and repaid on sale or refinance once complete.
Full Definition
Development finance is short-term funding used to pay for ground-up construction, conversion or substantial renovation projects, structured very differently from a standard mortgage because the security -- the finished property -- does not yet exist when the loan starts. Rather than releasing the full loan amount up front, the lender releases funds in stages as the project reaches agreed milestones, typically verified by an independent monitoring surveyor before each drawdown, covering the purchase of land or an existing building plus a build cost facility released as construction progresses. Interest is usually charged on the amount drawn down at any point rather than the total facility, and is commonly rolled up and added to the loan balance rather than paid monthly, since a development project generates no rental or trading income until it is finished; the loan and accrued interest are then repaid in one go from the sale proceeds, from long-term buy-to-let mortgage refinancing once complete, or from the developer's own resources. Because of the higher risk involved compared with lending against a finished, income-producing property, development finance carries higher interest rates and fees than a standard mortgage or even a bridging loan, and lenders scrutinise the developer's track record, the build cost appraisal and the planning permission in detail before agreeing terms.