Gross loan and net loan
The net loan is the money that actually goes into the scheme: the day-one land advance plus the build releases. The gross loan adds the interest and fees the lender reserves within the facility. Lenders test their loan to gross development value (LTGDV) limit against the gross loan, and their loan to cost (LTC) limit usually against costs including interest. So two quotes with the same headline LTGDV can deliver very different amounts of usable money. See LTV and LTGDV explained.
Retained, rolled and serviced interest
- Rolled-up: interest is added to the balance and repaid on exit. This is the norm in development finance, and interest compounds on the growing balance
- Retained: a forecast amount of interest is set aside in the facility at the start and drawn to pay interest as it falls due. If the build runs over and the retention runs out, you may need to fund the shortfall
- Serviced: you pay interest monthly. It is less common on development because a scheme produces no income until it is sold or let
Development interest is charged only on what has been drawn, so the shape of the drawdowns drives the interest bill. See how development finance drawdowns work.
How lenders forecast interest
To size the facility, a lender forecasts how the build money will be drawn and how much interest will build up. A straight-line forecast assumes equal monthly releases. An S-curve forecast reflects how construction usually spends money: slowly at the start during groundworks, fastest in the middle, and slowly again during finishing. The lender's cost consultant or monitoring surveyor often provides the cash flow.
The forecast matters because the reserved interest uses up headroom under the lender's LTGDV and LTC limits. A long or slow programme reserves more interest, leaving less for the build. Your appraisal should use the same programme as your lender to avoid a gap. See how to write a development appraisal.
Total cost and true monthly cost
Add up everything the lender charges over the realistic term: interest, arrangement fee, exit fee, non-utilisation fees on undrawn funds, monitoring surveyor visits, valuation and the lender's legal costs. That is the total cost of finance. Some in the market divide it by the number of months to give a true monthly cost, and express it against the net loan, so different structures can be compared on one figure.
Check how the exit fee is calculated. A fee on the facility or on GDV costs more than a fee on the amount actually drawn, and on a facility that is not fully drawn the difference can be significant. See how much development finance costs.
Return on capital employed
ROCE in property development is commonly worked out as profit divided by the capital you put in, your equity. Profit on cost and profit on GDV tell you whether the scheme works. ROCE tells you how hard your own money is working, which matters if your capital is limited and you want to fund more than one project.
ROCE is usually shown over the life of the project. To compare projects of different lengths, divide by the number of years to give an approximate annual figure.
A worked comparison (illustrative)
A scheme with a GDV of £3,600,000 has a land price of £800,000, acquisition costs of £40,000, build costs of £1,500,000 including contingency, professional fees of £150,000 and sales costs of £72,000. The programme is a 12-month build with 6 months to sell. Two illustrative facilities, both with a 2% arrangement fee, a 1% exit fee and about £15,000 of valuation and monitoring costs, both funding 100% of the build:
- Facility A: 9.75% a year, funds 60% of the land (£480,000). Interest about £210,000, total finance cost about £291,000. Profit about £747,000. Your cash in about £525,000. ROCE about 142%
- Facility B: 8.75% a year, funds 50% of the land (£400,000). Interest about £178,000, total finance cost about £256,000. Profit about £782,000. Your cash in about £605,000. ROCE about 129%
Facility B produces about £35,000 more profit, but needs £80,000 more of your cash, so each pound you invest earns less. If that £80,000 could fund the deposit on another project, Facility A may be the better choice. Interest is shown on a simple, straight-line basis for clarity, and the figures are illustrations, not quotes from any lender.
Comparing quotes in practice
- Ask each lender for the gross facility, the net loan and the reserved interest on the same programme
- Compare the total cost over the realistic term, plus three to six months' overrun
- Check how fees are calculated, including the exit fee basis and non-utilisation fees
- Work out your cash requirement and ROCE under each option
- Weigh certainty of delivery: a lender that funds reliably and on time is worth more than a small rate saving
Our development calculator works out LTGDV, loan to cost and profit on cost. Compare development lenders on Instant Quotes and apply online.
Common questions
How do I calculate ROCE on a property development?
Divide the expected profit by the cash you put into the project. For example, £747,000 profit on £525,000 of equity is a ROCE of about 142% over the life of the scheme.
What is the difference between gross and net loan in development finance?
The net loan is the money released for land and build. The gross loan adds the interest and fees reserved within the facility, and is the figure tested against the lender's limits.
How is development finance interest calculated?
On the amounts drawn, from the date each is drawn, usually rolled up and compounded monthly. Lenders forecast it using a cash flow of the build programme.
What is true monthly cost?
An informal way to compare quotes: the total cost of finance over the term divided by the number of months, often expressed against the net loan.
Is the cheapest rate always the best development finance?
No. Leverage, fees, the exit fee basis, the interest forecast and reliability all affect the total cost and your return on the cash you invest.
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.
