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Development finance is quoted in percentages that sound reassuring until you try to turn them into an actual number. Seventy per cent of cost, sixty-five per cent of value, some equity from you: fine, but what does that mean for the site in front of you, and how much cash do you actually need to find? The honest answer is that you have to run the numbers, because two limits are working at once and only one of them decides your loan.
This is a worked example rather than a glossary. We will take a realistic small scheme and push it through the two caps that every development lender applies, the loan to cost and the loan to gross development value, and see which one bites. By the end you will know how to estimate your maximum development finance and, just as importantly, the cash you need to bring to the table.
Here is how the maths actually works, on a real-looking deal.
The Two Limits That Decide Your Loan
Every development facility is governed by two ceilings at the same time, and your loan is the lower of the two. Miss this and the numbers never make sense.
Loan to cost
This caps the loan at a percentage of your total project cost, land plus build plus fees. Lenders commonly go up to around 75% of total costs. It controls how much of the spend they will fund.
Loan to gross development value
This caps the loan at a percentage of the finished value, the gross development value or GDV. Lenders usually stop around 65% to 70% of GDV. It controls how exposed they are against the completed scheme.
The lower number wins
Your facility is limited by whichever cap produces the smaller loan. A development finance for borrowers lender applies both and lends to the tighter one, which is exactly why running the example matters.
A Worked Example: A Four-Flat Scheme
Let us build a scheme. You are buying a plot with planning for four flats.
The figures
Say the land costs £300,000, the build costs £400,000, and fees and finance come to £100,000. That is a total project cost of £800,000. Once finished, the four flats are valued at £1,200,000, which is your GDV. Now we apply the two caps.
Applying the loan to cost cap
At 75% of the £800,000 total cost, the lender would fund up to £600,000. That is the loan to cost ceiling. On this measure, you would need to put in £200,000 of equity to cover the rest.
Applying the loan to GDV cap
At 65% of the £1,200,000 GDV, the lender would fund up to £780,000. That is the loan to value ceiling. On this measure alone, there is plenty of room.
Which cap bites?
The lower of the two is £600,000 from the cost cap, so that is your maximum facility. The GDV cap sat higher and did not restrict you this time. Your loan is £600,000, and your equity requirement is £200,000 plus a sensible contingency.
Working Out Your Cash Requirement
The loan is only half the story. What you really need to know is how much of your own money the deal demands.
Deposit on the land
Lenders usually advance a portion of the land cost on day one, with you covering the rest. In our example, if the lender funds part of the £300,000 land purchase, your day-one cash is the balance of the land plus your fees, before the build even starts.
Funding the build in stages
The build cost is released in tranches as the work progresses, so you are not handed £400,000 up front. Each stage is drawn as it completes, which means you may need working capital to get each phase to the point where the lender releases funds. Cash flow, not just the headline loan, is what keeps a site moving.
The contingency
Always add a contingency, commonly 5% to 10% of build costs, for the surprises that older buildings and ambitious schemes love to spring. Lenders expect to see one, and a scheme without a buffer looks naive rather than lean.
What Changes the Numbers?
The example is a snapshot. A few levers move it.
Your experience
An experienced developer may achieve a slightly higher loan to cost, because the lender trusts delivery. A first-timer might be offered a touch less, which increases the equity required. The scheme is the same, the terms flex with the borrower.
The strength of the GDV
If the finished value is punchy relative to costs, the GDV cap gives more headroom, as in our example. If costs are high relative to value, the GDV cap can be the one that bites, tightening the loan. This is why an honest, well-supported valuation matters.
The exit
A credible exit, selling the flats or refinancing onto a buy-to-let or commercial mortgage, underpins the whole calculation. Even perfect numbers will not fund a scheme with no way out. Sometimes a bridge is used to secure the site before the development facility is finalised.
The Clever Way to Size Your Facility
The percentages only mean something once you push a real scheme through them, and the moment you do, two things become clear: which cap decides your loan, and how much cash the deal genuinely needs. Get that clarity before you commit, and you buy sites you can actually fund rather than ones that look affordable until the maths catches up.
That is the heavy lifting we do. Send us the land, build and value figures for your scheme, we will run them through both caps and tell you straight what you can borrow and what you need to bring, then package and place your development finance for borrowers accordingly. Do the Clever thing.
Frequently Asked Questions
Neither on its own, because your loan is capped by whichever produces the smaller figure, and that varies deal by deal. On a scheme with strong finished value relative to costs, the cost cap usually bites, as in our worked example. On a scheme where costs are high relative to value, the GDV cap takes over. Running both is the only way to know your real maximum.
Commonly a fifth to a third of total costs, plus a contingency, though the exact figure falls out of the two caps once you apply them to your scheme. In the worked example, a £600,000 loan against £800,000 of cost left £200,000 of equity to find. Remember you also need working capital to fund each build stage before the lender releases the next drawdown.
Many will, though the figure depends on your experience, the scheme and the exit, and some sit lower. A strong, well-presented case with a credible exit and an experienced team tends to achieve the upper end, while a riskier or first-time scheme may be offered less. The percentage is a starting point, not a promise, which is why the presentation of the deal matters.
That is what your contingency is for, and why lenders expect to see one built into the appraisal. If an overrun exceeds the contingency, you may need to put in more equity or arrange additional funding, so honest costings from the start are worth their weight. Talking to your lender early if a problem emerges is always better than springing it on them late.