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How Development Finance Fund Releases Work

How Development Finance Fund Releases Work

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Property development finance covers a broad spectrum, but it is used to finance the construction or development of a property build or renovation in all cases.

Therefore, it works differently from a standard mortgage or loan, with the borrowing released in stages as the build progresses.

Here we've outlined the key information about staged releases and drawdowns and what to expect from your development finance loan. For more information about whether development finance is right for you, give us a call on 0330 304 3040 or email the Revolution Brokers team at info@revolutionbrokers.co.uk.

The following topics are covered below:

How Much of my Property Developer Finance Loan is Released Upfront?

How do Staged Payments Work in Developer Finance?

How Important is Cash Flow Management in Property Development Finance for First-Time Developers?

How Can I Keep Track of my Costs and Build Schedule on Top of Property Development Finance Interest Rates?

What Are the Typical Drawdown Stages on a Development Finance Project?

Can I Self-Certify My Property Development Project to Access Financing?

How Much of my Property Developer Finance Loan is Released Upfront?

Lenders will usually set a maximum on the amount of the loan they're willing to release before the development can begin.

In many cases, this is the financing used to purchase the property or land for the development.

Many lenders will offer up to 65% or 70% of the site value, with interest chargeable from the drawdown date.

You can usually borrow up to 100% of the building costs associated with your development project but will need a deposit towards the price of the land or property if you don't already own this.

Note that development finance products covering a high percentage of the costs will usually also carry the highest charges, and it's essential to look out for other costs such as exit fees and arrangement charges alongside the interest rate payable.

How do Staged Payments Work in Developer Finance?

Also known as tranches, development finance is released at fixed stages when a particular milestone is reached and the work has been signed off.

In most cases, the lender appoints a monitoring surveyor to verify when the milestone has been reached (for example, completing the foundations or weatherproofing the property).

The monitoring surveyor keeps track of the work as it is completed and ensures it is running to schedule. If they have any concerns, these are reported to the lender and developer to resolve, or update the planned drawdown dates.

Larger projects may have a dedicated surveyor who visits at a pre-agreed schedule, or they may visit the site regularly and report back on progress.

You agree on those stages in advance, so it won't be the case that you request a further drawdown and are rejected because you haven't completed a specific part of the project!

That's why it is crucial to include thorough costings for your development project in the initial application and decide on essential stages where it would be necessary to request a valuation, followed by a new drawdown of cash to finance the next steps.

How Important is Cash Flow Management in Property Development Finance for First-Time Developers?

Poor cash flow management might be the most significant reason developers come unstuck, so it's vital!

Development finance is often released retrospectively after a stage of the work has been completed. You'll also need to invest the deposit for the balance of the original site purchase cost.

Most developers need to finance works as they go, claiming the funding back at the relevant point. Hence, understanding exactly how the development has progressed and whether the costs are on budget is essential.

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How Can I Keep Track of my Costs and Build Schedule on Top of Property Development Finance Interest Rates?

To start with, you'll need a highly detailed schedule of works and a budget setting out the costings for each development element.

Lenders will need to see these plans before offering to lend and understand that some parts of the schedule will require a higher proportion of funding.

That means you can streamline the agreed tranches to align with your expected budget and schedule, rather than needing to pause work while you wait for the next stage to be released.

In some cases, the funds are available only in fixed values, spread equally throughout the project. In that case, you need to assess the costs carefully.

You might run into cash flow problems during crucial stages where you need more cash to cover the cost of the work. Conversely, you might have a month where the works are less expensive and end up drawing more than you need - and incurring interest on those unused funds.

Good planning, accurate estimates and having a robust contingency budget are all essential to good development finance cash flow management.

What Are the Typical Drawdown Stages on a Development Finance Project?

Every project will look somewhat different, so there isn't a predetermined number of steps.

For example, if you use development finance for a small-scale renovation, you might draw down all of the facility in one lump sum when the work begins.

More typically, you'll be using financing for a more significant extension, renovation or build, and so your tranches might be split as follows:

  1. When the agreement completes, you'll receive the first drawdown. If you are applying for financing to purchase a property or parcel of land, phase one will include this.
  2. Phase One completes - laying foundations, finishing groundworks and securing the site. Once the inspector has visited and confirmed the work is complete, the next batch of funding is released.
  3. Next, Phase Two could be the construction of the building shell, including timbers for the roof - again, a valuation visit is required before the lender signs off to release funding tranche three.
  4. The third phase might be to make the property watertight, including glazing, roofing and doors. Finally, once the internal fit-out is complete, the final funding is forwarded to the borrower.

Note that in some cases, the funding is retrospective. In that scenario, you'd need to finance the work out of pocket and then receive a drawdown when the lender has inspected progress and is happy to release the next tranche.

Some developments are substantially more complex, and there may be multiple phases. Others will be simpler with just one or two tranches of funding, so this is a rough indication rather than a standard procedure.

Since you only pay interest on the funds in use, it is ideal to avoid drawing down any more than you need for your current development work to ensure you aren't paying more interest than necessary.

When your development is complete, and all funds have been released, you will begin paying interest on 100% of the development finance facility, usually charged monthly.

At this point, the priority is to kick in your exit strategy to repay the development finance as quickly as possible.

Usually, that means appointing an independent valuer and applying to remortgage the finished work on the appropriate type of mortgage and/or listing the property on the market.

Can I Self-Certify My Property Development Project to Access Financing?

Lenders will typically appoint a valuer or project manager, depending on the size of your project. Therefore, you cannot self-certify that you've reached a particular stage of development to access the next batch of funding.

Instead, you will usually receive a visit from a quantity surveyor, who will establish that the work has been finished and meets the appropriate standards.

Typically this process doesn't take too long, and the surveyor will generally return a report to the lender within a day, with funds advanced to the borrower within 24 to 48 hours.

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FCA disclaimer

The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature. We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.

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