What is development exit finance, and when should you use it?

What is development exit finance?

It's a bridging loan built for one moment in a project: the build is done, but the units haven't all sold. Your development lender priced its loan for construction risk, and that loan has an end date. Exit finance pays it off and gives you a new, usually cheaper facility while the sales go through.

The difference from a standard bridging loan is mainly in what the lender looks at. A normal bridge is often about buying a single property, whereas development exit is about a finished scheme with multiple units. The lender will factor in the value unit by unit, and how quickly those units will sell or let. You'll also see it called development exit bridging, a development exit loan or, where some work is left, finish and exit finance.

When does it make sense?

When your development loan is close to its end date and units are still unsold. Running past term on a build facility usually triggers default interest, and selling at a discount to repay it can take a large slice of your profit. Exit finance moves the deadline, at a lower rate, while you sell properly.

It also suits developers who want to keep some units to let. You can sell part of the scheme, refinance the rest onto a buy-to-let or commercial mortgage, and use exit finance to cover the gap in between.

When it's the wrong tool: if the scheme is far from finished, you need a development loan extension or a fresh development facility, not exit finance. And if sales are already agreed and completing within weeks, a short extension from your current lender may cost less than new arrangement, valuation and legal fees.

How does it work, step by step?

1. You send the scheme details: the units, their values, what's sold or reserved, and the redemption figure on your development loan.
2. A lender gives indicative terms, then instructs a valuation of the finished units.
3. Solicitors check title, the completion paperwork and, for flats, the leases.
4. The exit loan completes and repays your development lender.
5. As each unit sells, part of the sale proceeds goes to the exit lender until the loan is repaid. Any units you keep are refinanced onto a term mortgage.

Start at least 3 months before your development loan ends. Valuations, legal work and a lender's questions all take time, and nobody can promise a completion date.

How much can you borrow?

Typically up to 75–80% of the value of the finished, unsold units. The lender works from its own valuation, not your price list, and some lenders also check how many units are already sold or reserved.

Valuation basis. Valuers can give more than one figure: the open market value of each unit, a lower value assuming a sale within 180 days, and sometimes a block value for all unsold units together. A block value is often lower than the units added up, and if a lender lends against it, your borrowing drops. Ask which basis the lender uses before you rely on a figure.

How does the sales release work?

When a unit sells, the lender takes an agreed share of the sale to reduce the loan; you keep the rest. Some lenders set a fixed release price per unit, others take a percentage of net proceeds and the terms vary from lender to lender. A high release price repays the loan faster but leaves you with less cash from each sale. Check the release terms against your cash needs before you sign.

Worked example (illustration only)

A developer builds 8 flats, valued at £300,000 each, so the gross development value (GDV) is £2.4m. Three have sold and those proceeds have paid down the development loan, which now has £900,000 to redeem with two months left.

Lenders usually apply their 75% limit to the gross loan, after interest and fees are rolled up, not to the day-one net advance. Here the net loan is 60% and the gross about 67%, so the case fits. After a 10% fall in values, the gross LTV is 74%, right at the limit: a slower sales period (more interest rolled up) or a further fall would push it over, and many lenders would then decline or lend less. That gap is why exits fail, and why the timing of your exit matters as much as the rate. The interest and fee figure is a round assumption, not a quote.

What does it cost?

Expect monthly interest plus fees: usually an arrangement fee, the valuation, your legal costs and the lender's and sometimes an exit fee. Interest can be paid monthly, rolled up into the loan, or retained (taken from the advance at the start) and the choice changes how much cash you receive. Our bridging loan costs guide explains each one. We don't quote rates here because they depend on the scheme, the LTV and the lender.

What do lenders want to see?

• Building control sign-off or a completion certificate, or a clear list of minor works left
• A new-build warranty the lender accepts
• A recent valuation of the finished units
• A sales schedule: what's sold, reserved, under offer and still to market
• The redemption statement from your development lender
• For flats, the leases and any title split
• Your company details and your plan for any units you'll keep

Development exit, extension or term refinance?

If you're past term already, see extend or re-bridge.

Why does exit finance fall through?

Usually because the LTV is too high by the time the build loan ends. Too few units have sold, the build has gone over budget, or sale prices have fallen and reduced the GDV. Any of these leave the loan too large against the value.

If your LTV is too high, you have options:

• Pay part of the loan down from your own funds or other sales.
• Offer additional security, such as another property.
• Sell or exchange on more units first, then refinance a smaller balance.
• Agree a short extension with your development lender while you do one of the above.

Can you raise capital for your next project?

Sometimes. Where the LTV allows, some lenders will lend more than the development loan balance, releasing equity you can put into the next site. It raises the LTV, so it only works when values and sales are strong.