Day one: the land advance
At completion of the site purchase, or a refinance of a site you own, the lender releases the day-one advance. It is capped as a percentage of the price or current value, so your equity goes in first. Some lenders also fund early professional fees or site set-up from this advance.
Before the first build release, the lender's monitoring surveyor reviews the appraisal, the build contract, the programme, the professional appointments and insurances, and confirms they are satisfactory.
Build releases
During the build, you, your contractor or your quantity surveyor prepare a drawdown request, typically monthly, setting out the work done and its value. The monitoring surveyor visits, checks progress against the programme and budget, and certifies the amount to release.
- Valuations are usually based on work completed, not materials ordered
- Some lenders release against agreed stages, such as foundations or roof on, rather than monthly
- The lender pays the certified amount, often directly to you or your contractor
- Funds are typically released within a few working days of the certificate
Paid in arrears: cash flow
Drawdowns are paid in arrears, after the work is done and checked. You or your contractor must fund each stage first. With a main contractor on monthly valuations, this usually fits their payment cycle. On self-managed builds paying trades weekly, you need working capital to carry each month.
Plan a cash flow forecast that shows when costs are incurred and when releases arrive, and keep a buffer. Delays in sign-off can slip a release into the next month.
Interest and fees during the build
Interest accrues on each tranche from the date it is drawn and is usually rolled up, so there are no monthly payments. Lenders reserve part of the facility for interest, which is why the total facility exceeds the land and build costs. Some charge a non-utilisation fee on undrawn funds, and each monitoring visit has a fee. See how much development finance costs.
Overruns, variations and retentions
If costs rise, the lender normally expects you to fund the overrun before further releases, a principle often called cost to complete. The monitoring surveyor checks that the remaining facility can still finish the build. Design changes and a change of contractor need the lender's approval.
Lenders commonly keep a contingency within the facility, and building contracts often include a retention held back from the contractor until defects are fixed. Both should be reflected in your appraisal.
Practical completion and exit
At practical completion, final releases are made, warranty and building control certificates are issued and sales or refinance begin. If sales will take longer than the remaining term, a development exit loan can repay the facility. To compare development lenders, use Instant Quotes.
Common questions
How often are development finance drawdowns made?
Commonly monthly, after a monitoring surveyor visit, although some lenders release against agreed build stages.
Are drawdowns paid in advance or in arrears?
Usually in arrears. You or your contractor fund each stage first and the lender reimburses the certified amount.
Do I pay interest on the whole facility?
Usually not. Interest is charged on each amount from the date it is drawn, though some lenders charge a fee on undrawn funds.
What happens if build costs overrun?
Lenders normally expect you to fund the overrun before further releases, so that the remaining facility can still complete the build.
What is a tranche in development finance?
A tranche is a single release of funds, such as the day-one land advance or one monthly build drawdown. Interest on each tranche runs from the date it is drawn.
What is peak debt?
The highest balance outstanding during the project, usually near the end of the build once all funds are drawn and interest has rolled up. Lenders size the facility against it.
How do lenders forecast interest on a development loan?
They model when build funds will be drawn, either evenly in a straight line or on an S-curve that is slow at the start and end and fastest mid-build, and reserve enough interest within the facility to cover the term.
This guide is for general information only and should not be treated as legal, tax or financial advice. Lender requirements depend on the property and your circumstances.
