Explore Property Development Finance Options for UK Developers

Property development involves numerous moving parts, which can mean significant expenditure, unexpected challenges and escalating costs. Therefore, many developers seek lending and investment solutions to help fund their projects.

In this article, we explore the main property development finance options and how they differ, to help developers choose a suitable funding route.

What is property development finance and how does it work?

Developing properties can be extremely lucrative, but it’s hard work and requires significant sums of money to get started and cover numerous costs throughout a project’s lifetime. That’s why there are various forms of development finance to help entrepreneurs and businesses get their wheels in motion.

Property development finance is a form of borrowing that helps fund housing development projects, from new site builds to renovations and refurbishments. It’s a short- to medium-term finance solution that enables developers to cover many of the costs involved, with capital usually secured against the properties.

Unlike mortgage finance, which typically involves longer loan periods with monthly repayments to cover the loan-to-value (LTV) amount for a property purchase, property development finance is designed to support the construction, refurbishment or conversion of properties. Many providers lend money based on the projected value of the completed property development. 

Usually, once a finance agreement is in place, the capital is released to developers in instalments, according to different project milestones.

The best property development finance options in the UK 

UK property development needs widely differ in scope, so there are different types of development loans and finance solutions for various requirements.

Here are the most common property development finance options for UK developers:

• Senior debt finance
• Mezzanine finance
• Bridging loans
• Joint venture finance

The best option for you depends on your specific circumstances. So, let’s look at each property development finance option, their key features and which might be most suitable for your project.  

Senior debt finance

Overview

Senior debt finance is popular for development projects, as it's a fairly low-risk finance model for lenders and offers better interest rates for developers. The capital issued becomes the first priority for repayment if the individual or organisation borrowing the money gets into financial difficulties.

Main features

• Loan amount/percentage: Banks or specialist lenders usually offer around 50-60% of the property’s projected value, referred to as gross development value (GDV), or up to 70-80% of the proposed project costs.
• Security: Finance is often secured against property or assets. You may need to provide a personal guarantee, depending on your financial position. 
• Repayment terms: You make monthly repayments until the costs of the loan (and accrued interest) have been fully repaid. 
• Flexibility: You can negotiate loan terms, repayment periods and security requirements to align with your borrowing needs. However, funds are normally dispersed in stages.
• Rates and fees: Interest rates are typically lower than standard loans due to reduced lender risks and security against the funds, but expect around 5-9% annually. Plus, you can sometimes roll up interest to pay at the end of the term. Most lenders require small arrangement fees and early repayment charges. 

Mezzanine finance

Overview

As a blended funding solution, combining loan facilities and private equity, mezzanine finance boosts available capital for development projects. This is ideal if the amount secured through debt financing falls short of expectations or doesn’t allow breathing space for unexpected costs. It can also unlock additional project opportunities.

Main features/components

• Loan amount/percentage: Mezzanine finance is a way to bridge funding gaps and extend financial reach, so it usually consists of a low proportion of overall project costs.
• Security: Rather than securing the debt against business assets or a personal guarantee, mezzanine finance lenders can include rights in the agreement to convert debt to equity at a future date or when certain conditions are met.
• Repayment terms: Varies widely, depending on the lender or your borrowing preferences. Some agreements include interest-only, payment-in-kind (PiK), interest deferral, balloon payment or profit-sharing options.
• Flexibility: Mezzanine finance agreements are tailored to developer and lender needs (with the lender’s vested interest in the project's success) and potential options to convert debt to equity.
• Rates and fees: Mezzanine finance is typically a second-charge debt with higher interest rates, approximately 12-20% annually, but interest may be rolled up and repaid at the end of the project. Agreements can be complex and usually incur arrangement fees of 1-3%.

Bridging loans

Overview

Bridging loans are short-term financing solutions that bridge gaps in funding. For property developers, this kind of loan enables fast access to additional capital needed before or during projects, helping overcome cash flow issues, boost working capital, cover unexpected costs or reach the project’s ambitions.

The UK has seen a surge in bridging loans in recent years, reaching record demands, by the end of 2024, and is expected to grow by 25% over the next five years, according to Mintel’s UK Bridging Loans Market Report 2024. 

The flexibility and speed of approval of commercial bridging loans make them popular in time-sensitive projects like property development.

Main features/components

• Loan amount/percentage: Loan amounts are usually dictated by property value, with lenders offering a percentage of this value (around 40-75%).
• Security: Often secured against the value of the properties.
• Repayment terms: Bridging finance usually spans months rather than years to cover funding gaps in key development project periods. Loan repayments are typically made through refinancing or after property sales.
• Flexibility: The loan structure can be highly flexible and easy to arrange to meet time-critical project needs. Interest can be paid monthly or rolled up to pay at the end of the term.
• Rates and fees: Bridging loan interest rates are normally higher than in traditional loans, and a monthly rate is often quoted, rather than an annual percentage rate (APR), likely between 0.5 and 1% (dependent on the LTV).

Joint venture finance

Overview

Joint venture finance is where two or more parties are involved in financing a development project. You may partner with another developer, landowner or investor to pool your resources, combine expertise and share the risks and rewards of the venture.

The structure depends on investor intentions but typically involves a pre-agreed profit share or decision-making control once development is finished or properties are sold.

Main features/components

• Loan amount/percentage: The amount of capital provided can widely vary, depending on how debt will be repaid or profits distributed. Therefore, the partner/investor could even agree to cover all project costs or fund as much as the projected property is worth.
• Security: Rather than requiring collateral, the security in providing funds is an agreed equity stake/share of the profits.
• Repayment terms: The deal usually amounts to a profit-sharing agreement rather than any set loan/capital repayments.
• Flexibility: Negotiations can take time, but agreeing to a profit share can reduce pressure, charges and gaps in capital while a collaborative approach can help overcome key project challenges. However, after project completion, you may be restricted by certain controls you’ve relinquished.
• Rates and fees: Profit-shares are usually 30-50% of future profits from the development. Depending on how money is lent or pooled as part of an agreement, there may be no interest to pay. 

How do you qualify for property development finance?

Most property development finance lenders will accept applications from limited companies, individuals/sole traders and partnerships. Lenders all have their own eligibility requirements, however, most will want to understand your level of expertise, assess the feasibility of the development and gauge your risk level. 

You’ll be subject to varying eligibility requirements, depending on the option. Here are the main qualification factors property development finance lenders will evaluate:

• Your financial stability and the creditworthiness of any partners
• Your property development experience and profitability of recent projects
• The projected property value after the completion of development work
• Your equity levels, amount of capital sought and the proposed LTV
• The timeframe for the project and subsequent property sales
• Project plans, forecasts and exit strategies
• Property appraisals, surveys, valuations and planning permission
• The value of collateral, beyond the properties, that may be used as security
• Existing credit agreements and debt levels outstanding

What’s the difference between bridging finance and property development finance?

Bridging finance acts as a type of property development finance, but can also be used for commercial mortgages, acquisitions or other capital needs. The main difference between bridging finance and property development finance is that the former is a loan to bridge a finance gap and help developers reach the required amount to complete their projects. 

Bridging finance is a shorter-term solution than most forms of property development finance, such as senior debt finance and other property development loans – typically, a matter of months to overcome temporary cash flow gaps or serve timely finance needs, such as purchasing a property, acquiring a business or management buy-out.

Suitability considerations

• Bridging loans are suitable for developers with immediate needs, requiring fast access to funds.
• Developers can use bridging loans to help fund site acquisitions or get a project over the line if it’s over budget or timelines.
• Deferred principal and interest payment options in bridging loans ease cash flow pressure in key periods.
• Traditional property development loans suit experienced developers engaged in large-scale construction and development projects.
• Senior debt finance is often only available to developers with a proven track record, so first-time developers may need to explore other funding options.

When to consider joint venture finance and mezzanine finance

Mezzanine finance is an option to consider if you want to combine equity and debt solutions to achieve your funding goals. Whereas, going down the joint venture route is a way to get the funds you need without worrying about monthly repayment terms, interest fees or other loan-related charges. However, the compromise is giving up a level of control and a percentage of future profits, so weigh up the pros and cons of partnering with another developer or investor. 

Suitability considerations

• Mezzanine financing can fill the gap between senior debt solutions from traditional lenders and equity investment, reducing upfront project costs and relieving financial and operational pressures.
• While incurring higher interest fees, the greater flexibility of mezzanine finance is useful for managing costs during the project.
• Joint venture finance is best suited to developers with high-profit potential projects but limited capital. 
• Entering a joint venture can bolster your reputation, expertise and project potential while spreading financial responsibilities and risk, and present future revenue opportunities.

Can I get property development finance as a first-time developer?

In some cases, many lenders won’t approve first-time property developer finance, particularly for large-scale projects or if you don’t have a great personal or business credit history. You might get approved for bridging loans or mezzanine finance if you have certain equity or credit secured elsewhere, but you may struggle to get approved for senior debt finance. 

Some lenders accept first-time property developers who can provide a personal guarantee or have high-value assets for collateral.

How to raise finance for your first property development project

If you can’t secure funds for your first development project through the usual property channels, there are other ways to raise the required capital. Here are some common options to explore:

Using personal savings or equity release

If you can leverage personal savings for property development and refurbishment, you’ll have greater control and avoid the fees involved in sourcing a loan or finance agreement. However, it’s a risky route in an uncertain market and industry with a lot of pitfalls.

Another option is to release equity from an existing property or asset, giving you access to funds to develop properties while agreeing on new mortgage or refinance terms. This can leave you exposed though in the event of unexpected issues.

Alternative funding solutions you can explore

Other avenues to explore are those less reliant on your credit rating or first-time developer status. Alternative funding options for property development include:

• Angel investors
• Crowdfunding
• Flexible business loans
• Invoice financing

Angel investors and crowdfunding are ways to source development funds by generating interest in your project, demonstrating its revenue potential and promising a share of the profits, level of control or reward for investing.

Invoice finance provides quick access to working capital tied up in client invoices, with minimal interest to pay, small lender margins and high approval rates, with lending decisions primarily focused on your clients’ creditworthiness. 

Certain private lenders, like iwoca, provide flexible business loans to those with limited financial track records or property development experience. We can provide fast access to capital, based on viable project plans, with flexible usage and repayments.

Comparing property development finance lenders, brokers and peer-to-peer (P2P) lending

There are several routes to go down when sourcing property development finance, including direct lenders (banks and financial institutions), brokers (acting as intermediaries to find suitable financing options) and peer-to-peer lending platforms, which connect you with lenders/investors who see value in your development plans.

Direct lenders and finance brokers

Direct lenders provide more out-of-the-box funding solutions, whilst using a finance broker can help you get a more tailored solution. Brokers leverage their lender network to craft finance agreements aligned with your needs, often offering faster capital release, less stringent eligibility criteria and greater flexibility.

Peer-to-peer lending platforms

Using peer-to-peer lending platforms, like Folk2Folk or LendInvest, can help first-time developers secure capital by being matched with lenders on the platform’s network, overcoming some of the usual hurdles and barriers to access involved in securing loan agreements from banks or traditional finance providers. 

Using a flexible business loan to fund a property development project

Many alternative funding solutions involve giving up some control or a proportion of profits, while property development finance has certain restrictions, like the staggered release of funds, GDV ceilings and early repayment charges. Using a flexible business loan to fund property development strips away many limitations and drawbacks.

Here are the key advantages of iwoca’s Flexi-Loans:

• A quick and easy online application process
• Less stringent eligibility criteria for applications
• Fast approvals and transfer of funds – you’ll get a decision within 24 hours and funds are often transferred a few hours after approval
• Flexible repayment terms, tailored to business needs and cash flow
• You only pay interest on the funds you draw down
• No early repayment charges and options to top-up capital once you have paid at least third of the loan back.

You can apply online in minutes, with minimal documentation requirements. We look beyond the credit score, focusing on factors like business plans and revenue potential, to provide opportunities to first-time developers. Borrow between £1,000 and £1,000,000 for a few months or up to 5 years and use funds as and when needed during your development project. 

Find out how to get a business loan from iwoca online or use our business loan calculator to see your likely repayment costs. 

Sources:

• UK Bridging Loans Market Report 2024 [Mintel]
• Guide to Property Development Loans [iwoca]
• A Guide to Commercial Bridging Loans [iwoca]
• How are Property Developments Financed? [Harper James Solicitors]
• Alternative Business Funding – What Are the Options? [iwoca]

‍