Residential Mortgage Rates Are Rising. Why Has One Development Lender Cut Rates?

Funding 365 has reduced the starting rate on its ground-up development finance product to 0.74% per month after adding a £300m institutional funding line. At a time when residential fixed mortgage rates are moving higher, the change shows why SME developers should price their actual scheme rather than infer development costs from the Bank Rate headline.

The new structure applies to ground-up development loans from £250,000 to £3m. According to Mortgage Introducer’s report published on 17 September, rolled-interest pricing starts at 0.74% per month at up to 60% net day-one loan-to-value, rising to 0.79% at up to 65% and 0.84% at up to 70%.

This is a specific lender move, not evidence that every development finance rate is falling. It is commercially useful because it shows that institutional funding, lender capacity, competition and the risk of the individual project can move specialist finance in a different direction from mainstream residential mortgages.

Why Can Development Finance Fall While Residential Mortgages Rise?

A residential fixed mortgage and a ground-up development facility are different credit products with different sources of risk and pricing. Residential fixed rates respond heavily to wholesale interest-rate expectations, lender funding and competition for owner-occupier borrowers. Development finance also reflects the lender’s cost of capital, but the terms can be shaped by institutional funding agreements, the lender’s appetite to grow a particular loan book and the risk attached to the development itself.

Funding 365 announced the additional £300m institutional facility in June. The line was intended to expand lending across bridging, refurbishment, development and specialist buy-to-let products and sits alongside its existing institutional funding. The September rate change is an example of additional capacity being translated into borrower pricing in one segment.

That does not mean the broader interest-rate environment has stopped mattering. It can influence the lender’s own funding, the developer’s exit mortgage and the demand faced by eventual buyers. But it is only one input. A developer who assumes the cost must have increased solely because residential mortgage rates rose may be relying on the wrong comparison.

The Market Is Selective Even Where Headline Pricing Improves

Mortgage Introducer cites Bridging & Development Lenders Association data showing that combined bridging and development completions fell from £2.5bn in the fourth quarter of 2025 to £1.8bn in the first quarter of 2026. Applications fell from £11.7bn to £9.9bn, while total lender loan books reduced from £13.4bn to £11.5bn.

Those figures describe a market with lower activity and more selective capital, not a simple shortage of finance everywhere. A lender with fresh institutional capacity may compete more strongly for schemes that fit its credit model while remaining cautious about build-cost evidence, drawdowns, contingency and exit.

That distinction matters for SMEs. Better pricing does not weaken the requirement for a credible appraisal. The lender still needs to understand how the site will be acquired, when works will be drawn, whether the borrower can fund costs before reimbursement, how overruns will be covered and how the facility will be repaid.

The 0.74% Headline Is Not the Total Cost of the Loan

Funding 365’s current product page confirms the three advertised rate tiers and the £250,000 to £3m loan range. The lowest rate is attached to the lowest day-one LTV tier. A developer cannot compare 0.74%, 0.79% and 0.84% in isolation because each tier involves a different borrower equity contribution and risk position.

Rolled interest also needs to be modelled properly. Interest added to the facility can reduce the cash paid monthly, but it still consumes facility headroom and increases the amount due. The result depends on the amount drawn, the timing of drawdowns, whether interest is calculated on drawn or retained sums, the development period and any extension.

The 2% arrangement fee, 1% exit fee and professional costs can materially affect the appraisal, particularly on a smaller or shorter scheme. A rate that looks cheaper per month may not produce the lowest total funding cost once leverage, fees, monitoring and timing are included.

A Lower Rate Does Not Automatically Repair a Marginal Scheme

Finance is only one line in a development appraisal. Land price, build cost, professional fees, contingency, planning conditions, sales values, sales period and tax can have a larger influence on profit. A lower monthly rate can improve the result, but it cannot compensate for an unrealistic gross development value or an underfunded build programme.

Our earlier analysis showed how different lender leverage created a £1.03m difference in available debt on the same £3.7m development. That remains the central lesson. The cheapest rate is not automatically the best facility if it leaves an equity gap the developer cannot fund, excludes important costs or creates drawdown pressure during construction.

Conversely, maximum leverage is not always the best result. Additional debt increases interest, fees and sensitivity to delays. The correct comparison is the complete capital stack: land and existing equity, day-one advance, works contribution, retained or rolled interest, contingency and the exit balance.

Which Paused or Declined Schemes Should Be Revisited?

The strongest candidates are schemes where finance cost was the principal reason for delay and the underlying development case remains sound. That may include a small residential site whose earlier terms made the profit margin too thin, a developer who was asked to contribute more equity than expected or a scheme where the original lender’s drawdown structure created a cash-flow gap.

Terms issued several months ago may no longer represent the most suitable part of the market. The developer’s position may also have changed: planning conditions may have been discharged, contractor pricing may be firmer, pre-application work may be complete or the exit evidence may be stronger. Each of those changes can affect lender appetite independently of the headline rate.

A previously declined case also needs careful handling. The reason for the decline should be identified before another lender is approached. If the issue was planning uncertainty, weak cost evidence, inadequate contingency or an unsupported exit, a new lender with a cheaper rate will still need the underlying problem resolved.

Works in Arrears Make Cash-Flow Planning Essential

Where works are funded in arrears, the developer normally needs enough liquidity to pay contractors and suppliers before the relevant drawdown is released. The exact process depends on the facility, monitoring surveyor and evidence required. A scheme can be profitable on paper and still stall if the developer cannot bridge the timing between expenditure and reimbursement.

The funding review should therefore map when each cost falls, the anticipated certification process and the reserve available for delays or overruns. VAT treatment and recovery timing may also affect cash flow and should be checked with the project’s tax adviser. Monthly interest and fees are only useful when placed against that drawdown schedule.

The Exit Still Determines Whether the Facility Works

A ground-up facility ending after 12 or 18 months needs a credible repayment route. If the plan is sale, the lender will consider the projected completed value, demand, sales period and evidence from comparable properties. If the scheme will be retained, the developer needs a realistic refinance based on completed value, rental income, interest coverage and the likely term-lender criteria.

A slower sales period adds interest and can push the facility towards expiry. A refinance that depends on rates or values improving is not the same as an evidenced exit. The development finance may have become cheaper, but the exit should be tested against today’s market and a downside scenario.

What Architects, QSs and Development Advisers Can Identify

Land agents, architects, quantity surveyors, accountants and solicitors often know which schemes have paused because earlier finance terms did not work. The current pricing change provides a reason to reopen those conversations, provided the project evidence is refreshed rather than an old appraisal simply being sent to another lender.

A quantity surveyor can help update costs and contingency. The architect or planning consultant can confirm remaining conditions and programme dependencies. The accountant can clarify the equity position and tax assumptions. The solicitor can identify title, planning-obligation or acquisition issues that could affect drawdown. Coordinating that information before the finance request gives lenders a clearer case to assess.

How Willow Private Finance Can Help

Willow can re-test a development against the current lender market, including cases that were paused, declined or priced several months ago. We compare the day-one advance, works facility, LTC, LTGDV, interest treatment, fees, monitoring, drawdown process, required equity and exit rather than selecting a facility from the monthly rate alone.

The latest Funding 365 change may be relevant to smaller ground-up schemes, but it is one option within a wider market. Our role is to establish which lenders fit the property, borrower, experience, costs, timetable and exit, then show the developer the cash requirement and total structure before an application proceeds.