Development Loan Interest Rates: How the Price Is Actually Built

A development loan does not have a rate in the way a fixed rate mortgage has a rate. It has a construction: a reference rate that moves with the market, plus a margin that is fixed at credit approval and never moves again. Almost every argument developers have with lenders about pricing is really an argument about the second half of that sentence.

This matters because of the drawdown. Development finance is released in tranches against certified work, so the balance the rate is applied to changes every month. A margin you negotiated down by a quarter of a percent is worth a fraction of what a build programme finished two months early is worth, and yet developers spend their energy on the margin. Understanding how the price is calculated tells you where the real money is.

What is a development loan actually pricing?

A development loan is short-term secured finance that funds a construction scheme in stages and is repaid from the sale or refinance of the finished property. That is the product. The price attaches to three risks the lender is carrying, and every element of property development finance pricing traces back to one of them.

Construction risk is the first: the possibility that the building costs more or takes longer than the cost plan says. The lender is exposed to this from first drawdown until practical completion.

Value risk is the second: the possibility that the finished property is worth less than the gross development value in the appraisal. The lender is exposed to this from day one until the last unit sells.

Exit risk is the third: the possibility that the scheme is finished, correctly valued, and still does not sell or refinance inside the term.

A commercial lender prices those three, in that order, and then adds its own cost of funds underneath. There is no fourth thing. When a margin comes back higher than you expected, one of those three is the reason, and asking which one is a far more useful conversation than asking for a discount.

How is the interest rate on a development facility calculated?

Two components, added together, quoted as one number.

The reference rate is the cost of money. Most property development finance in the UK is priced over either the Bank of England base rate or a market benchmark rate that tracks it closely. The Bank of England base rate has been 3.75 percent since December 2025. That component floats: if the reference rate moves during your build, your interest bill moves with it, which is why a development loan is almost never a fixed rate product.

The margin is the lender’s price for your specific risk. It is set at credit approval, written into the facility agreement, and fixed for the term. This is the component the lender controls and the component that reflects your scheme.

Add them and you get the headline. Across our lender panel development finance starts from 6.5 percent a year and rises from there. On a case priced at the bottom of that range, roughly 2.75 percentage points of it is margin over the current reference rate, and the rest is simply the cost of money in 2026.

Now the part that gets missed. That annual rate is charged on the drawn balance, day by day, not on the facility size. A £2,000,000 facility that averages £1,100,000 drawn over 18 months at 6.5 percent costs about £107,000, not £195,000. Two developers with the same facility, the same rate and different build discipline pay materially different amounts of interest.

Interest is also rolled up on nearly every development loan rather than serviced monthly, because a part-built property produces no income. Rolled up interest compounds inside the facility, so it is charged on a balance that includes previously accrued interest. Over a long programme that compounding is not trivial.

What sets the margin on one property development finance case rather than another?

Seven things, roughly in order of weight.

Gearing comes first. A development loan at 55 percent of gross development value prices well below one at 70 percent, because the equity underneath the debt is what absorbs a value fall. The step between those two points is often worth more than a full percentage point of margin.

Experience comes second. A developer with four completed schemes of similar size and type is a different credit from one with none, and lenders price that difference directly. This is the single biggest lever a borrower cannot pull quickly.

Scheme type comes third. Straightforward residential housing prices best. Apartments price a little above it. Commercial and mixed use price above that again, because the exit depends on letting rather than on selling. Anything with unusual construction, deep basements or complex groundworks carries a premium for the same reason.

Contractor and contract come fourth. A named main contractor on a fixed price contract with a track record reduces construction risk visibly. A developer self-building with a series of trade packages increases it, and the margin says so.

Location and sales depth come fifth. A scheme in a market with active comparable sales evidence is easier to exit than one where the last similar unit sold three years ago.

Facility size comes sixth. Small loans carry proportionally more work for the lender, so sub £500,000 development loans often price above larger ones despite being lower risk in absolute terms.

Speed comes last, and it is real. A borrower who needs credit approval in ten days is paying for that, on any commercial facility.

How much does a development loan cost when every fee is counted?

Take a £2,000,000 facility on an 18 month build with a three month sales tail, averaging £1,150,000 drawn, and work the costs through properly.

Interest at 6.5 percent a year on the average drawn balance over 21 months comes to roughly £131,000. That is the biggest single line and it is entirely a function of two things you control: how much you draw and how long you hold it.

Arrangement fee at 1 to 2 percent of the facility is £20,000 to £40,000, deducted at first drawdown rather than paid in cash.

Exit fee, where one applies. Read the basis. One percent of the loan is £20,000. One percent of a £3,100,000 gross development value is £31,000. The headline number is identical and the money is not.

Monitoring surveyor costs run across the whole build: an initial appraisal, then a fee for every site visit through the programme.

Valuation, borrower legal costs and lender legal costs complete the list, and on property development finance the borrower pays both sides.

Total funding costs on a facility of this size land somewhere around £190,000 to £230,000. Set against total scheme costs, that is the number to carry into your appraisal, and it is roughly six to eight percent of gross development value on a typical residential case.

Two costs developers forget. Non-utilisation fees, charged by some lenders on committed but undrawn funds, which punish an over-sized facility. And extension fees, typically 0.5 to 1 percent plus a margin uplift, which is what a programme overrun actually costs on top of the extra interest.

Every figure here is indicative and none of it is a quote. The same case across a panel of over 100 lenders comes back with a genuinely wide spread of rates and costs.

Do you need a deposit for a development loan?

Yes, though deposit is the wrong word for what is happening.

There is no percentage deposit in the mortgage sense. What there is instead is a gap between what the lender will advance and what the scheme costs, and the borrower fills it. That gap is created by two caps working at once.

Loan to gross development value caps the total facility at 65 to 70 percent of the finished value on our lender panel. Loan to cost caps it at a proportion of what the scheme actually costs to build, commonly around 90 percent. Whichever bites first sets the number.

In practice the equity lands on the land. Most lenders advance 50 to 65 percent of site value at completion, so on a £900,000 site the borrower funds £315,000 to £450,000 plus stamp duty and acquisition costs. If you already own the site outright, that equity is already in the deal as land value, and a facility that funds 100 percent of build cost is entirely normal.

So the honest answer to how much you need to put in is between 10 and 35 percent of total costs, depending on the scheme, and it needs to be visible in an account rather than promised.

Borrowers sometimes try to borrow the equity. Lenders check for it, and a second charge behind a senior development loan requires the senior lender’s consent, which is not given casually.

How hard is it to get a development loan approved?

Harder than a mortgage, easier than developers fear, and the difficulty is almost entirely in the paperwork rather than in the decision.

Lenders decline development loans for a short list of reasons. The gross development value does not stand up against comparable evidence. The build cost is too low for the specification, which a monitoring surveyor spots immediately. There is no contingency. The contractor is unnamed or unproven. The planning consent has conditions still to discharge that could change the scheme. The exit is asserted rather than evidenced. Or the developer has no experience and no professional team compensating for it.

Notice what is not on that list. Personal credit history matters far less than in consumer lending, because this is business borrowing against an asset. Company age matters little, because the borrower is usually a new special purpose vehicle. Your income does not come into it at all.

The realistic timetable is four to eight weeks from a complete submission to drawdown, of which the credit decision is often the fastest part. Valuation, monitoring surveyor appraisal and legals take the time. A borrower who arrives with a full pack shortens that meaningfully; one who assembles it as the lender asks does not.

How to get 100 percent development finance, and what the price tells you

The phrase is used loosely enough to be misleading, so separate the three things it can mean.

One hundred percent of build cost, with the site already owned unencumbered, is common and unremarkable. Your land is the equity.

One hundred percent of total costs, funded entirely by debt, does not exist at senior level because the LTGDV cap makes it arithmetically impossible on any scheme where costs exceed 70 percent of gross development value. Where it appears, it is a stack: senior property development finance to 65 or 70 percent, mezzanine finance behind it at around 12 percent a year taking the total to 85 to 90 percent LTGDV, and the residue from the developer or an equity partner.

One hundred percent with no money in at all is a joint venture, not a loan. The capital comes in as equity and takes 40 to 60 percent of the profit for it.

The price is the tell. When the blended cost of a structure runs into the teens as a percentage, you are not looking at cheap gearing, you are looking at someone else taking the risk you declined to take and being paid for it. That can still be the right decision on a scheme with a fat margin. It is a bad decision on a thin one.

How does property development finance price against the alternatives?

A development loan is not the only way to fund a build, and the comparison is more useful than a table of rates suggests, because these products are priced on different clocks.

Senior property development finance is the cheapest debt in the stack. From 6.5 percent a year on our lender panel, charged annually on a drawn balance, up to 65 to 70 percent LTGDV. Cheap per pound and slow to arrange.

Bridging loans are priced monthly rather than annually, from 0.55 percent a month, and that difference in convention hides how the two compare. Held for a full year a bridging loan at 0.75 percent a month costs 9 percent, above property development finance. Held for three months to secure a site before consent, it costs 2.25 percent in total and no development lender would have completed in the time. Bridging is dearer per year and often cheaper per job.

Mezzanine finance is the second layer rather than an alternative. From 12 percent a year, stretching the total to 85 to 90 percent LTGDV behind the senior loan. Nobody uses it because it is cheap. They use it because the equity it replaces would have cost more.

Equity and joint venture capital sits at the top and is not priced as a rate at all. It takes 40 to 60 percent of the profit. On a scheme with a thin margin that is ruinous and on a scheme you could not otherwise build it is free money, and the arithmetic is entirely scheme specific.

Commercial mortgages are the exit rather than the funding, from 5.5 percent a year with rental income covering 125 to 150 percent of the payment. Relevant here only because a developer holding the finished property is comparing a development loan plus a commercial mortgage against a longer, dearer facility.

The point of setting them side by side is that the right question is never which product has the lowest rate. It is which structure costs least across the actual life of the scheme, and on most builds that answer is senior property development finance drawn late and repaid early, with something else filling the gaps at either end.

What should a borrower read first on a property development finance term sheet?

Six lines decide the cost of a development loan, and the interest rate is only one of them.

The rate line, obviously, but read what it is quoted over and whether it floats. Property development finance quoted at a margin over a reference rate behaves differently from a flat annual rate, and on an 18 month build in a moving market that difference is real money.

The fee lines, all of them. Arrangement fee at 1 to 2 percent of the facility. Exit fee, and critically whether it is charged on the loan or on gross development value. Non-utilisation, charged by some lenders on committed but undrawn funds, which is how an oversized facility quietly costs you.

The drawdown mechanics. How often can you draw. How long between request and release. What the monitoring surveyor has to certify. A property development finance facility that releases in five working days is worth more to a live site than one that is a quarter cheaper and takes three weeks.

The cost overrun provision. Nearly every property development finance agreement requires the borrower to fund a projected overrun in cash before further funding is released. That clause converts a paper problem into an immediate cash call.

The minimum release prices, where the loan is repaid from unit sales. These set the floor under your pricing, and a floor set too high removes the flexibility to move a slow unit.

The term and the extension terms. Extension is at the lender’s discretion, typically for 0.5 to 1 percent plus a margin uplift. Two lenders with identical headline property development finance pricing can differ enormously in how they behave when a build runs late, and a build running late is the most likely thing that will happen to you.

Compare those six across offers and the cheapest development loan on the front page is often not the cheapest facility in the end.

Why do two lenders price the same commercial scheme so differently?

Because they are not funded the same way and they do not want the same deals.

A clearing bank funds property development finance from deposits, which is cheap, and it manages that advantage by lending conservatively to established borrowers. A specialist development lender funds from wholesale lines or a debt fund, which costs more, and it earns that back by lending faster and further up the gearing curve. An institutionally backed fund has capital with a target return attached, and it prices to that target regardless of what the market is doing.

Appetite moves independently of cost. A lender that has just written three commercial schemes in the same city may price the fourth defensively simply to manage concentration. Another that is under-deployed against its allocation may price the identical case keenly to win it. Neither of those has anything to do with your scheme.

This is why quoting a development loan against a single lender tells you almost nothing. The spread across a panel on one case is regularly wider than any negotiation you could win with one lender, and the work is in finding which lenders actively want that shape of deal this quarter.

How do you compare three development finance quotes properly?

Not by the rate. By the total cost of funding across the actual programme, which is a different ranking almost every time.

Put three offers on the same £2,000,000 facility side by side. Offer A quotes 6.5 percent a year with a 2 percent arrangement fee and a 1 percent exit fee on gross development value. Offer B quotes 7.25 percent with a 1 percent arrangement fee and no exit fee. Offer C quotes 6.9 percent with a 1.5 percent arrangement fee, a 1 percent exit fee on the loan, and a non-utilisation charge on undrawn funds.

On an average drawn balance of £1,150,000 over 21 months, Offer A costs about £131,000 of interest, £40,000 of arrangement fee and £31,000 of exit fee on a £3,100,000 gross development value. Total, £202,000.

Offer B costs about £146,000 of interest and £20,000 of arrangement fee. Total, £166,000. The dearest headline rate is the cheapest facility by a wide margin, and it is not close.

Offer C costs about £139,000 of interest, £30,000 of arrangement fee and £20,000 of exit fee, plus whatever the non-utilisation charge comes to on an oversized commitment. Total, £189,000 and rising.

Three lessons fall out of that, and they hold across nearly every property development finance comparison we run.

Fees dominate on short facilities. Interest dominates on long ones. A property development finance quote is only comparable once you have modelled it against your real programme, because the crossover point between two offers moves with the number of months.

Exit fees charged on gross development value are consistently the most expensive line developers overlook, because the base is bigger than the loan and the percentage looks identical.

And the flexibility terms belong in the comparison as costs, not as footnotes. A facility that draws quickly and extends cheaply is worth paying for on a scheme with any construction risk in it, and every scheme has construction risk in it.

This is also why quoting one lender tells a developer very little. Property development finance quotes on the same case regularly differ by more than 20 percent of total funding cost, and the ranking flips depending on how long you actually borrow for. Two developers who borrow the same money on the same site for different lengths of time should rationally choose different lenders.

What can a borrower actually do to move the price?

Five things, in descending order of impact.

Reduce the gearing. Every step down the LTGDV scale is worth real margin, and putting an extra £100,000 of equity in can pay for itself several times over across an 18 month development loan.

Shorten the programme. Interest follows the drawn balance through time, so two months saved on the build is two months of interest not paid, plus two months less exposure to a soft market.

Draw later and draw less. Funding the early works from working capital keeps the balance down, and interest is charged on what is drawn.

Strengthen the pack. A quantity surveyor’s cost plan, a named contractor, evidenced comparable sales and a real contingency all reduce perceived risk, and perceived risk is what the margin prices.

Take the whole facility to market rather than to a lender. That is the work a broker does, and on a development loan it is where the spread is.

What does not move the price is asking. Development lending is credit committee lending, and the margin is an output of a risk assessment rather than an opening position.

Where do development finance rates sit in 2026, and what moves them next?

The reference rate half of the price is the easy half to reason about. The Bank of England base rate has been held at 3.75 percent since December 2025, and while property development finance is not a base rate tracker, the cost of every lender’s funding line moves with the same underlying market. If that reference rate falls, development finance rates on new facilities follow within a quarter or so. If it rises, they follow faster.

The margin half is driven by something else entirely: how much capital is chasing property development finance deals and how confident lenders are about end values. When funding is plentiful and sales are quick, margins compress and gearing creeps up towards the top of the 65 to 70 percent LTGDV range. When lenders are nervous, margins widen and the same commercial scheme is offered 60 percent instead of 70.

Two practical consequences for a developer pricing a build now.

First, a floating development loan is not a bet on rates so much as an acceptance that you cannot hedge a facility whose balance you do not yet know. Fixed rate property development finance exists but it is priced for the certainty, and on a drawdown facility that certainty is worth less than it looks.

Second, appraise the scheme at a rate above the one you are quoted. Residential margins are thin enough that a scheme which only works at 6.5 percent is a scheme that does not really work. If it still stacks a point and a half higher, you have a real project rather than a rate-dependent one.

Development finance rates, like all commercial loans, are ultimately a price for risk in a particular quarter. They are not a fixed feature of the market, and a scheme designed to survive them moving is worth more than a scheme designed around today’s number.

If you have a scheme to price, we price a development facility across a panel of over 100 lenders and will tell you where the gearing is costing you more than it is worth. Where senior debt runs out, mezzanine finance is the next layer. Where the finished property is being held and let rather than sold, the exit is commercial mortgages. Where the requirement is a fast site purchase rather than a build, bridging loans are the cheaper tool.

Construction Capital is a trading name of Lenzie Consulting Ltd, registered in England and Wales, company number 08174104. We are a commercial finance broker and introducer, not a lender, and we are not authorised by the FCA. Rates and terms are indicative, vary by lender and deal, and are never an offer of finance. Written by Matt Lenzie.