Development Finance Costs Explained

Development finance is not a single cost but a collection of fees and charges that together make up the total cost of your funding. Understanding each component is essential for accurate project appraisal and for comparing offers from different lenders.

The total cost of a development finance facility depends on the loan amount, the interest rate, the length of time the funds are drawn, the arrangement and exit fees, and the various professional fees associated with the transaction. For a typical Hackney development project, finance costs might represent 8-15% of total project costs, depending on the structure and duration.

We believe in complete transparency around costs. Before you commit to any facility, we provide a detailed breakdown of every cost component so you can make an informed decision. This section explains each component in detail.

Development finance interest rates in the current market typically range from 0.65% to 1.2% per month, equivalent to approximately 7.8% to 14.4% per annum. Several factors determine where your rate falls within this range:

Loan to Cost ratio: Lower LTC generally means lower rates because the lender's risk is reduced. A project at 55% LTC will attract better rates than one at 70% LTC.

Developer experience: Experienced developers with a proven track record can access the most competitive rates. First-time developers may pay a premium of 0.1-0.3% per month.

Project type: Straightforward residential new builds or conversions attract the best rates. More complex projects, mixed-use schemes, or those in unusual locations may carry a premium.

Planning status: Projects with full planning permission achieve better rates than those with outline consent or relying on Permitted Development.

Interest is usually rolled up during the construction phase, meaning it is added to the loan balance rather than being paid monthly. This preserves cash flow during the build but means the total interest cost compounds over the term. We model the total interest cost for our clients so they understand the real cost of their facility.

Arrangement fees are charged by the lender to set up the facility. They typically range from 1% to 2% of the gross facility amount. For example, on a 2 million pound facility, the arrangement fee would be 20,000 to 40,000 pounds.

Arrangement fees are usually deducted from the initial drawdown, so you do not need to pay them upfront in cash. However, they are added to the loan balance and attract interest, so they increase the total cost of the facility.

Exit fees are charged by some lenders when the facility is repaid. They typically range from 0% to 1% of the gross loan. Not all lenders charge exit fees, and this is an important point of comparison between different offers.

We negotiate hard on arrangement and exit fees on behalf of our clients. In many cases, we can secure reduced fees or have exit fees waived entirely, particularly for experienced developers or for projects that represent repeat business for the lender.

Several professional fees are incurred during a development finance transaction:

Valuation fees cover the cost of the independent RICS valuation that all lenders require. The valuer assesses the current value of the site and the projected Gross Development Value upon completion. For Hackney projects, valuation fees typically range from 2,000 to 5,000 pounds depending on the size and complexity of the scheme.

Legal fees are incurred on both sides of the transaction. You will pay your own solicitor to act on your behalf, and you are also required to pay the lender's legal fees. Combined, legal fees typically range from 5,000 to 15,000 pounds for a standard development finance transaction.

Monitoring Surveyor fees cover the cost of independent site inspections during the build phase. The Monitoring Surveyor visits at each drawdown stage to verify that work has been completed satisfactorily. Each visit typically costs 500 to 1,500 pounds, and there may be 4-8 visits during a typical project.

Broker fees: Our fee as your development finance broker is typically 1% of the facility amount, payable upon successful completion of the facility. This is a success fee, meaning you only pay it if we successfully secure your funding.

To illustrate the total cost of development finance, here is a worked example based on a typical Hackney scheme:

Project: 6-unit residential conversion in Stoke Newington. Total project cost: 1.5 million pounds. Senior development finance facility: 1.05 million pounds (70% LTC). Interest rate: 0.75% per month. Term: 12 months. Average drawn balance (due to staged drawdowns): 700,000 pounds.

Cost breakdown: - Interest (0.75% x 700,000 x 12 months): approximately 63,000 pounds - Arrangement fee (1.5% of 1,050,000): 15,750 pounds - Exit fee (waived through negotiation): 0 pounds - Valuation fee: 3,000 pounds - Legal fees (both sides): 8,000 pounds - Monitoring Surveyor (5 visits at 750 pounds): 3,750 pounds - Broker fee (1% of 1,050,000): 10,500 pounds

Total finance costs: approximately 104,000 pounds, representing about 6.9% of total project costs.

This example demonstrates why it is essential to factor finance costs into your project appraisal from the outset. The total cost is significant and must be covered by the profit margin in your scheme. We model these costs in detail for every project we handle, ensuring there are no surprises.