Two different products for two different purposes
Development finance and commercial mortgages are both forms of property lending, but they are structured fundamentally differently because they serve different purposes. Confusing the two — or applying for the wrong one — wastes time and can signal to lenders that you do not understand the market.
Development finance
Purpose: Funding the construction or heavy refurbishment of property. Used for ground-up new builds, conversions, and major renovation projects.
- Loan structure: Short-term (12–24 months). Day-one advance for land/acquisition, then staged drawdowns tied to construction milestones.
- Interest: 8–14% pa, rolled up (added to the loan balance, not paid monthly).
- Security: The development site and the works in progress.
- Repayment: On exit — from sales proceeds or refinance to term debt.
- Monitoring: Lender-appointed monitoring surveyor inspects progress before each drawdown.
- Key ratio: LTGDV (loan against completed value).
Commercial mortgage
Purpose: Purchasing or refinancing existing, income-producing commercial property. Used for offices, retail, industrial, and mixed-use investment property.
- Loan structure: Long-term (3–25 years). Single advance at completion. No staged drawdowns.
- Interest: 4–8% pa, serviced monthly from rental income.
- Security: The completed, tenanted property.
- Repayment: Monthly interest payments (sometimes with capital repayment). Loan repaid at term end or on sale/refinance.
- Monitoring: None (no construction to monitor).
- Key ratio: LTV (loan against current value) and debt service coverage ratio (rental income vs mortgage payments).
When you need development finance
- You are building new property from the ground up.
- You are converting a building from one use to another (e.g., office to residential).
- You are doing heavy refurbishment that requires planning permission.
- The property is not currently income-producing and will not be until works are complete.
When you need a commercial mortgage
- You are buying an existing commercial property to hold as an investment.
- You are refinancing a completed development that is now tenanted.
- You are releasing equity from an existing commercial property you own.
- The property is already income-producing.
The development-to-mortgage lifecycle
Many property projects use both products in sequence. Development finance funds the build phase. Once the project is complete and generating rental income, the developer refinances onto a commercial mortgage at a lower rate for the long-term hold. This two-stage approach is particularly common for build-to-rent projects and mixed-use schemes where the commercial element is retained.
When applying for development finance, having a clear refinance exit strategy — including evidence that commercial mortgage terms would be available on completion — strengthens the application and gives the lender confidence in the exit.