Property development finance: how staged funding works

Development finance is short-term lending that funds the construction or conversion of a property, with the money released in stages as the work progresses. It is different from a mortgage on a finished building, because the asset that secures the loan does not exist yet.

It is used for new homes, conversions, refurbishments and commercial schemes. The borrower is usually a company set up for the project or an established developer, and the loan is repaid when the finished units are sold or refinanced. If you only need quick money to buy a site or a building, a bridging loan may be the closer fit. Development finance is built around the works that follow.

Development finance is not only a commercial product. The government’s National Housing Bank, which covers England, describes its own offer to smaller housebuilders as development finance, which shows how standard the staged model has become.

Staged funding means the lender releases the loan in instalments, often called drawdowns, as each part of the build is completed. You do not receive the whole facility on day one and you do not normally pay interest on money you have not drawn.

A typical sequence looks like this, although every lender sets its own structure:

• The lender reviews the site, planning position, costs, programme and your track record, and values the scheme.
• A monitoring surveyor, who acts for the lender, signs off the budget and the build programme.
• The first drawdown funds the land purchase, or the part of it the facility covers.
• Before each later drawdown you report progress and the surveyor inspects the site to confirm the work matches the money requested.
• Funds are released against the certified stage, sometimes paid to contractors directly.
• The final stage is paid on completion, and the loan is then repaid from sales or refinanced.

The point of the structure is that the lender’s money only goes into work that has actually been done, so its security grows in step with the loan.

The stages follow the build, from buying the site to practical completion. The table below shows an illustration of how a lender might split a scheme. The labels are generic and the split is set by each lender and surveyor, not by a rule.

Lenders look at the project, the numbers and the developer. The loan is secured on the site, so the value of the finished scheme and the cost to build it matter as much as your own finances.

• The scheme: planning position, build costs, the programme and the expected value on completion.
• Your contribution: most lenders expect the developer to put in some of their own money. How much is set by each lender.
• Experience: a record of similar projects, or a professional team with one.
• The exit: how the loan will be repaid, through sales of the units or a refinance onto longer-term finance.

Two ratios come up often. Loan to cost compares the loan with what the scheme costs to build. Loan to value compares it with the property’s value, and for development a lender may look at the value once the work is finished. Our guide to loan to value explains the second ratio in plain terms.

A development lender normally takes a legal charge over the site and, for a company, may take wider security such as a debenture. Companies House describes a charge as the security a company gives for a loan, and a mortgage is a type of charge.

A charge given by a company must be registered at Companies House within 21 days, starting the day after it is created. If it is not, the lender may find it hard to recover the debt if the company becomes insolvent, and only a court can allow an extension. Lenders and their solicitors handle this, but you should know it is part of every secured deal. Read more on how a debenture works and how secured lending compares with unsecured.

Directors are often asked for a personal guarantee as well. Read what it commits you to before you sign.

Development finance costs interest plus fees, and the total depends on the lender, the scheme and the risk. We do not quote rates here because they move and differ by deal. What matters is knowing which costs exist so you can compare offers on total cost.

The FCA defines an interest roll-up mortgage as one under which neither capital repayments nor payment of the accruing interest are required or anticipated until it ends. Rolling up interest keeps cash free during the build but the balance grows, so model it. Our guide to comparing lender offers covers total cost in more detail.

A development brings stamp duty on the land, VAT on construction and separate approvals, none of which the loan removes. Capzy does not give tax or legal advice, so confirm each point with an accountant or solicitor.

• Stamp Duty Land Tax (SDLT): it applies to land bought in England and Northern Ireland above the threshold, which GOV.UK gives as £125,000 for residential and £150,000 for non-residential land and property as of October 2026. A return and payment are due within 14 days of completion. Scotland and Wales have their own taxes.
• Residential purchases: you usually pay 5% on top of the standard residential rates if you own another residential property, and reliefs may apply. See our guide to stamp duty on commercial property for the non-residential side.
• VAT: if you construct a new building you will normally charge VAT at the standard rate, but some construction of qualifying buildings can be zero-rated. HMRC’s Notice 708 sets out the conditions.
• Planning and building control: GOV.UK says building regulations approval is different from planning permission and you might need both.

The main risks are cost overruns, delays and a weaker exit than you planned, and each can leave the loan outstanding longer than the term allows. Interest keeps running while a scheme is late, and a lender can pause drawdowns if the surveyor is not satisfied.

• Build costs rise during the project, and the contingency in the budget runs out.
• A stage fails inspection, so the next drawdown is delayed and contractors wait to be paid.
• Sales take longer than expected or values fall, and the refinance on completion is harder to arrange.
• A personal guarantee or wider security puts more than the site at risk.

If the scheme is struggling and you cannot meet the loan, speak to the lender early, and to a licensed insolvency practitioner if the company is under pressure. Our overview of company insolvency explains why directors should take advice sooner rather than later.

Lending to a company for a development is generally outside the FCA’s consumer credit perimeter, but a mortgage to an individual can be regulated. A regulated mortgage contract is one secured on land where at least 40% is used, or intended to be used, as or in connection with a dwelling by the borrower or a related person. The Regulated Activities Order excludes certain business-purpose loans, including investment property loans.

The rules turn on who borrows, what the property is for and why. A scheme for sale or let to others, borrowed through a company, will usually sit outside regulation. If you plan to live in part of what you build, tell the lender and take legal advice, because that can change the position.

Capzy is a credit broker, not a lender, and is paid by the lender. We introduce businesses to lenders that offer property finance, and the lender directory groups them by product. Whether a lender can help depends on the scheme, your experience and the lender’s criteria.

You can check your funding options with a soft search that does not affect your credit score. A full application may involve a hard search, and any offer is subject to status and lender criteria. If you are working on a building project as a contractor, our page on construction finance covers working capital for the trade.