The typical sequence
Development finance has a fixed term — usually 12–24 months. When that term expires, the full loan balance (principal + rolled-up interest) becomes immediately repayable. If you haven't sold your units or completed a refinance by that date, here's what typically happens:
Stage 1: Default interest kicks in
From the day the term expires, your interest rate increases to the default rate specified in your facility agreement. This is typically 3–5% above your standard rate. If you were paying 9%, you're now paying 12–14%. This additional cost accrues daily and adds up quickly on a large facility.
Stage 2: Extension negotiations
Most lenders will offer a formal extension — typically 1–3 months at a time. The extension is at the default rate and may include an extension fee (0.5–1% of the outstanding balance). The lender wants to see a credible plan for repayment: sales under offer, refinance application in progress, or a clear timeline to completion.
Extensions are not automatic or guaranteed. The lender has the contractual right to demand immediate repayment. They offer extensions as a pragmatic solution — repossession is expensive and time-consuming for everyone.
Stage 3: If no solution is found
If the borrower can't repay, can't sell, can't refinance, and the lender loses confidence in the situation, the enforcement process begins:
- Formal demand letter: The lender's solicitors issue a formal demand for repayment.
- LPA receiver appointment: The lender appoints a Law of Property Act receiver — an independent professional who takes control of the property to manage its sale and recover the lender's money.
- Forced sale: The receiver markets and sells the property. Sales under receivership typically achieve lower prices than voluntary sales because of time pressure.
- Personal guarantee enforcement: If there's a shortfall after the property is sold, the lender pursues the personal guarantors for the remaining balance.
This worst-case scenario is extremely rare. Lenders lose significant money on enforcements — legal costs, receiver fees, and below-market sale prices. They strongly prefer to find a solution. But it does happen when communication breaks down or the situation is unrecoverable.
How to avoid this situation
- Build programme contingency: Whatever timeline your contractor gives you, add 3–6 months. Factor this into your development finance term from the start.
- Start your exit early: Begin sales marketing or refinance applications at least 3 months before term expiry. Don't wait for practical completion — start while finishing touches are underway.
- Communicate proactively: If you see delays building, tell your lender immediately. Requesting an extension 3 months before expiry is dramatically easier than requesting one the week of expiry.
- Have a backup exit: If Plan A is selling individual units, have Plan B ready (bulk sale to an investor, refinance to BTL). Assesr's credit paper includes exit strategy analysis to ensure you have viable options.