Development Finance Explained: Bridging vs Development Finance, LTV, and Arrangement Fees

Bridging finance vs development finance — what's the difference?

Both bridging finance and development finance are short-term property loans, but they're structured differently and used for different purposes.

Bridging finance is typically used to purchase a property quickly — before planning permission has been granted, or while you arrange longer-term development finance, or to complete on a property at auction where you have a 28-day completion deadline. Bridging is usually secured on the current value of the property only (not the uplift), so you'll typically be able to borrow 65–75% of the purchase price. Interest rates tend to be slightly lower than development finance, ranging from 0.5–0.9% per month, but the LTV is lower and you generally can't draw funds for build costs.

Development finance is specifically designed for projects where you need to fund both the land/acquisition and the build costs. Development lenders lend against the Gross Development Value (GDV) of the completed scheme, not just the purchase price. A typical development facility might lend 70% of total project costs, or 65% of GDV — whichever is lower. Crucially, development finance is drawn in stages as the build progresses, rather than all at once. This keeps your interest costs lower because you're only paying interest on what you've actually drawn.

How LTV works in development finance

LTV — Loan to Value — in development finance context is usually expressed as a percentage of total project cost (LTPTC) rather than the traditional purchase price LTV used in mortgages.

A 70% LTV on a £500,000 total project cost means the lender will provide up to £350,000 of finance. You need to provide the other 30% (£150,000) in cash. This cash requirement is one of the most important figures in any appraisal — it determines whether you have enough capital to proceed.

Some lenders also cap their lending at 65% of GDV, so you need to check both limits. A deal with a £500,000 project cost and £700,000 GDV: 70% LTPTC = £350,000; 65% of GDV = £455,000. The lower limit applies, so the max facility is £350,000.

How interest is calculated on development finance

This is where many developers make mistakes. Development finance interest is charged monthly on the outstanding drawn balance, not on the total facility. Since funds are drawn in stages, the average drawn balance over the project is typically around 60% of the facility size.

Example: You have a £350,000 facility at 0.85% per month over 12 months.

• If you drew the full £350,000 on day one: interest = £350,000 × 0.85% × 12 = £35,700
• At 60% average drawn: interest = £210,000 × 0.85% × 12 = £21,420

That's a significant difference. Make sure your appraisal tool accounts for staged drawdown rather than assuming the full facility is drawn from day one.

Arrangement fees

Development lenders charge an arrangement fee — typically 1.5–2.5% of the facility size — at the point of drawdown. On a £350,000 facility at 2%, that's £7,000. This is in addition to your broker fee (if you used a broker to source the finance, typically 1–1.5% of the facility).

Some lenders allow the arrangement fee to be added to the loan (rolled up), which conserves your cash but increases the drawn balance and therefore interest costs.

Exit fees

Exit fees are charged when you repay the loan. They're typically 1–2% of the facility size. On a £350,000 facility at 1.5%, that's £5,250. Don't forget to include this in your appraisal — it's often overlooked.

What lenders look for

Development lenders typically want to see:

• Experience — most won't lend on a first development. Some specialist lenders will lend on a first project if you have a strong team (experienced project manager, established contractor).
• Minimum margin on GDV — most lenders want to see at least 20% profit margin in the appraisal before they'll lend.
• Planning — ideally the planning permission is in place before drawdown, though some lenders will lend pre-planning with conditions.
• Exit strategy — a credible plan for how you'll repay the loan (sale, refinance, etc.)
• Monitoring surveyor — most lenders appoint an independent monitoring surveyor (MS) to sign off each drawdown. Budget £500–£1,500 for the initial report and £300–£600 per drawdown visit.

Typical costs summary

Cost	Typical Range
Monthly interest rate	0.7–1.1%/month
LTV (of total project cost)	60–75%
LTV cap (of GDV)	60–65%
Arrangement fee	1.5–2.5% of facility
Exit fee	1–2% of facility
Broker fee	1–1.5% of facility
Monitoring surveyor	£1,500–£5,000 total

Calculating total finance cost

The simplest way to get an accurate finance cost in your appraisal is to use a dedicated development calculator that handles all of these variables automatically. Marginly's deal appraisal calculator applies the 60% average drawn assumption, calculates arrangement and exit fees as a percentage of the facility, and shows you the total finance cost broken out clearly — so you can see exactly what each element costs and adjust the assumptions for your specific deal.