How to finance a property development project in the UK

Whether you’re embarking on a large-scale new build property development, renovating properties to rent, or expanding your buy-to-let portfolio, securing the right funding is a critical step in turning your vision into reality. Very few developers, whether seasoned professionals or first-timers, have the cash reserves to fund every aspect of a project outright. That’s where property development finance comes in.

Property development finance covers a wide range of funding solutions designed for residential, commercial, or mixed-use projects. With so many options available, it can feel overwhelming to know which route to take. Below, we break down the main financing options, how they work, and when each might be suitable.

1. Development finance

Development finance is a short- to medium-term funding option designed for building projects, from major refurbishments to ground-up construction. Unlike a standard mortgage, the funds are usually released in stages, known as drawdowns, which are linked to the progress of the build.

Key features:

• Provides an initial lump sum to purchase the land or property.
• Subsequent payments are released as the project reaches agreed construction milestones.
• The interest is rolled up, meaning payments are added to the loan balance rather than paid monthly. This helps keep cash flow available for the build itself.
• Usually requires planning permission before the funds are released.

When to use it:

Development finance is ideal for new-build projects, large refurbishments, or conversions.

Example:

You purchase an old office building to convert into flats. Development finance can cover the purchase cost and ongoing refurbishment expenses, with funds released as work progresses.

2. Bridging finance

Bridging loans are designed for speed. These short-term, interest-only loans provide quick access to funds, often within days, making them perfect for situations where timing is everything.

Key features:

• Short-term solution (usually 1–18 months).
• Interest rates are higher than those of traditional loans.
• Secured against property or land.
• Flexible usage, including purchases without planning permission or for properties deemed “unmortgageable” by standard lenders.

When to use it:

• To secure a property at auction (where completion is required in 28 days or less).
• While waiting for longer-term finance to be approved.
• To renovate or make a property mortgageable.

Example:

You successfully bid on a run-down property at auction that you plan to refurbish and sell. A bridging loan enables you to complete the purchase quickly, carry out the works, and repay the loan when you sell or refinance the property.

3. Buy-to-let mortgage

If your development involves purchasing a property to rent out, a buy-to-let mortgage could be the right fit. This type of mortgage is assessed on the rental income potential rather than your personal salary.

Key features:

• Can be interest-only or capital repayment.
• Lending amounts are typically based on the rental income.

When to use it:

• Ideal for adding a new rental property to your portfolio or refinancing an existing one.

Example:

You purchase a flat to rent to tenants. The rental income is high enough to cover the mortgage payments and provide a profit, allowing you to build a portfolio gradually.

4. Commercial mortgage

A commercial mortgage is similar to a residential mortgage, but specifically for commercial property—anything from offices to warehouses and retail units.

Key features:

• Longer-term funding solution (5–25 years).
• Loan amount is based on the property’s rental income potential or your business’s trading performance.
• Suitable for both owner-occupied premises (where your business operates) and commercial investment (where you rent it out to others).

When to use it:

• If your project involves purchasing premises for your own business or acquiring income-producing commercial property.

Example:

A café owner wants to purchase the building they currently rent. A commercial mortgage allows them to invest in their business premises and build equity.

5. Second charge mortgage

A second charge mortgage (or secured loan) is taken out on a property that already has a mortgage, allowing you to release equity without remortgaging.

Key features:

Secured against the same property as your first mortgage.
Useful for raising additional capital for improvements or development.
Repayment is secondary to the first mortgage, meaning the first mortgage is repaid first in the event of a sale.

When to use it:

When you have significant equity in a property but don’t want to remortgage, perhaps because your first mortgage has a favourable interest rate.

Example:

You own a property worth £500,000 with £200,000 left on the mortgage. You take out a second-charge mortgage to fund a loft conversion and ground-floor extension.

Other ways to finance property development

While the five options above are the most common, property developers sometimes use alternative methods, such as:

• Joint venture (JV) partnerships: Partnering with an investor who provides funding in exchange for a share of the profits.
• Private investors: Individuals willing to fund a project in return for agreed interest or equity.
• Crowdfunding platforms: Gathering contributions from multiple investors for a particular project.

Choosing the right financing option

Before deciding how to fund your property development, consider the following questions:

• At which stage is my project currently, such as planning, purchase, construction, or refinancing?
• How soon do I need the funds?
• What is my exit strategy (e.g. sale, refinance, rental income)?
• What risks might impact my ability to repay?

When considering property development finance, it’s also essential to account for associated costs such as legal fees, surveyor charges, arrangement fees, and potential overruns in budget or schedule.

The importance of professional guidance

The world of property finance can be complex. Lenders each have their own criteria, and the right structure can mean the difference between a profitable development and a financial disaster. Working with an experienced commercial finance broker can:

• Match you with the most suitable lenders for your project.
• Increase your chances of approval by presenting your application professionally.
• Negotiate competitive terms.
• Save you time so you can focus on delivering your project.

At ASC, we specialise in guiding property developers, from first-time builders to experienced investors, through every stage of financing. Whether you need development finance, bridging loans, buy-to-let mortgages, or commercial lending, our expert brokers can assist you:

• Assess your options.
• Maximise your approval chances.
• Structure finance to suit your goals.

With ASC supporting you, you can focus on what you do best – turning property potential into profit.