Development finance rates
This section breaks down what typical development finance interest rates are and the factors that impact them.
What development finance interest rates will I pay?
The interest rates offered by lenders depend on the loan amount, your experience, site location and the amount of loan as a percentage of the gross development value (GDV).
Loans below £500,000 – these loans tend to pay a higher rate due to the amount of work involved in managing a project. Loans tend to start at around 6.5% per annum, however, these rates are generally only available for experienced property developers. Rates around 9% per annum are common.
Loans above £500,000 – loans at this size to an experienced developer, at a loan to GDV below 70% would most likely be charged between 4.5% and 7.5% per annum depending on demand and quality of the scheme.
For smaller or higher risk loans, a rate between 0.85% per month and 1.35% per month (10.2% to 16.2% per annum) is more realistic. Rates from 6.5-7.5% are common for most applications for experienced developers on loans over £1,000,000. To see a selection of the latest rates based on your circumstances, head over to our development finance comparison page.
How are property development finance interest rate decided?
Property development finance rate are decided based on the following factors:
- Loan size
- LTGDV and LTC of the scheme
- The experience of the applicant and their team
- The credit history of the applicants
- The location of the scheme
Development finance interest rate types
Interest is expressed either on a monthly basis, or annually. Regardless of whether it is quoted monthly or annually, you only pay interest for the time that the funds are borrowed. Repaying the loan early would result in a reduction in the interest paid.
The best development finance deals are achieved by putting down a larger deposit
Higher gearing will usually result in an increase to the interest rate that you’re charged. When comparing the products available on a given scheme, to a given borrower, putting down a larger deposit will usually mean a lower rate.
Of course, you have to offset this against whether it’s a good idea to pay a larger deposit. This decision will usually come down to how much it would ‘stretch’ you financially and whether the funds could be better used elsewhere.
How is interest charged on a development finance facility?
Interest is charged on a property development finance facility monthly, with the interest rate being expressed on either a monthly or annual basis. The interest charged is usually added to the loan each month based on the outstanding balance (not the facility size).
How can I get a lower rate on my property development loan?
Lower interest rates are offered to developers with the greatest experience. Each lender has its own pricing structure and the difference in cost can be significant, even where the headline rate charged is identical.
As these loans are priced on a case by case basis, shopping around is the only way to ensure you’re getting the best deal. A good broker will do this for you. When working with a broker, make sure they’re experienced in the field as it is very specialist and can be complex for the uninitiated.
In many cases, first time developers will pay a higher rate on their first project, in order to get started in the industry. Subsequent developments will usually be charged lower rates.
Can development finance interest be offset against tax?
Yes, any interest and fees charged by your development finance lender can be offset against tax, reducing your liability.
When switching to development exit finance, all fees and costs from this facility can also be offset against your profit.
How is the monthly interest handled?
In almost all cases, the interest is rolled up and the majority of fees added to the loan. This means there are usually no monthly payments to make.
Should you choose to pay the interest each month, some, but not all lenders will allow this. It is rare for a developer to choose to pay monthly, as cash flow is already difficult to manage during a project, so monthly payments are usually unwelcome.
Where you’re choosing to pay the interest monthly, further detail around your income and ability to make payments will be required.
Property development finance fees
This section covers everything you need to know about the fees charged on property development loans.
What fees will I have to pay when taking out property development finance?
Lenders tend to charge a number of fees, for ease, we have broken these down:
Arrangement fee: The arrangement fee, often known as the facility fee, is usually charged by the lender as a set-up fee for the loan. It is generally between 1-2% of the loan.
Exit fee: This is not charged by all lenders, but the majority do. The fee is payable to the lender when repaying the loan. Generally, the charge will come in at 1-2% of either the loan amount or GDV. It is important to understand what your exit fee is charged against as the difference between a charge against loan amount and GDV can be significant.
Broker fees: Brokers often charge fees for finding the best lender and managing your application to completion at the best possible terms. Some lenders will pay the broker a fee for successfully placing the application with them (usually 1%), while others will pay nothing.
Valuation fees: As mentioned above, the lender will instruct a valuation to complete a report on the development. There is no set valuation fee but it tends to be higher for more expensive schemes.
Professional fees: On top of the valuation fee, other professionals are likely to be needed and of course they will charge for their services. Expect to pay out for architects, quantity surveyors and solicitors. Depending on the scheme, you may also need to pay for project managers and monitoring surveyors.
At ABC Finance, we usually expect to earn 1% from a successful development finance application, which will mean we wouldn’t generally charge a broker fee as long as the lender pays us.
A big additional cost in these loans are non-utilisation fees. In many cases, interest charges are only levied on the amount of funds drawn down, rather than on the full facility.
Non-utilisation fees are a set charge on funds that are yet to draw down and can significantly add to the costs of your loan.
It’s important that you check for these fees before committing to work with a lender.
LTC, LTGDV, ongoing position, cash flow & stage release payments
The maximum loan on property development finance applications is decided using several factors. Unlike traditional mortgages that are able to use the loan to value to determine the maximum against a property of a certain value, development finance has to use several calculations. They are:
Loan to Cost (LTC): Loan to cost – LTC – is a metric used to compare the amount of loan offered as a percentage of the total cost of building the project. Loan to cost often comes in at between 80-100%. 90% LTC is common subject to meeting the criteria around loan to GDV e.g. if the construction costs are £500,000, 90% LTC would be a loan of £450,000.
Day 1 Position: Lenders will always look at the amount of money they are expected to release upfront to get the project moving and purchase the site. The maximum available is generally 65-70%, with more sometimes available if suitable additional security is offered. Some lenders ignore the day 1 position as long as the project fits the LTC and LTGDV metrics.
Loan to Gross Development Value (LTGDV): The loan to gross development value is the maximum loan expressed as a percentage of the GDV – the value of the project once completed. Excluding joint venture development finance, the maximum loan to GDV available currently is 75% e.g. if the completed build value is £1m, the maximum loan to GDV would be £750,000.