Your equity in a development scheme: how much and when it goes in

Development finance can cover up to 90% of total project costs, but that is a ceiling rather than a typical outcome. What a lender will actually advance depends on the scheme, the borrower's experience and the evidence behind the numbers. Whatever the figure, the balance is the developer's own money, and working out how much of it you need, and when, is part of the application.

What counts as a cost

Total project costs are wider than the build. They usually include the land or the existing property, construction, professional fees, planning and legal costs, finance costs and a contingency. Leaving items out makes the equity requirement look smaller than it is, and the lender's surveyor will notice.

Equity often goes in first

Lenders commonly expect the developer's equity to be spent before their own funds are advanced, or alongside the first stage. If you are buying the land, your deposit is part of that contribution. If you already own it, a lender may take the land into account, typically at a value that its own surveyor supports.

An illustrative example

Assume a scheme with total costs of £1,000,000: land of £400,000, build costs of £500,000 and £100,000 for fees, finance costs and contingency. Assume the lender advances 70% of total costs.

- Loan: £700,000 - Developer equity: £300,000, which is 30% of costs

Now suppose the build costs rise by 10%, or £50,000. A lender's facility is usually set against the original budget, so the extra cost typically falls to the developer. Equity becomes £350,000, which is 35% of the original costs. This is an example only, not a quote, and real terms will differ.

Planning for the gap

- Build a realistic contingency into the appraisal rather than hoping not to need one. - Keep cash available beyond the minimum equity, so an overrun does not stall the site. - Ask early whether the lender will count the land, and how it will be valued. - Show where each part of your contribution is coming from.

A lender that sees a developer who has thought about the gap tends to have more confidence in the rest of the appraisal. One who has not often finds the conversation slows down at exactly the point it should be moving forward.

If you are weighing up a scheme, a broker can help you test how much equity it is likely to need before you commit to a purchase.