Development finance works differently to a standard mortgage. You do not draw the full amount on day one. You draw it in stages as the build progresses. This makes the interest calculation different.
The industry standard assumption is the 60% drawdown rule. Over the life of the development, the average loan balance is roughly 60% of the total facility. You multiply this average balance by the annual interest rate and the term in years to estimate your total interest cost.
Here is a practical example. You have a £400,000 development facility at 7.5% over 18 months. Your average loan balance is 60% of £400,000, which is £240,000. Your total interest is £240,000 times 7.5% times 1.5 years, which equals £27,000.
Compare that to a standard loan where you draw the full £400,000 on day one. The interest would be £45,000. The 60% rule saves you £18,000 in interest costs.
This has a practical implication. If you can structure your build to draw smaller amounts earlier, your average balance stays lower and your interest costs drop. If you front-load the project and draw large amounts early, your average balance is higher and your interest costs rise.
Some developers order materials just-in-time to keep drawdowns low. Others front-load to secure materials during shortages. The 60% rule gives you a baseline to compare different drawdown schedules.
The formula
Average Loan Balance = Total Facility × 60%
Interest Cost = Average Loan Balance × Annual Rate × (Term Months / 12)
Why this matters
The 60% drawdown rule is the standard way to estimate development finance interest. Structuring your build to draw smaller amounts early can save you significant interest costs.
Running these calculations before you buy is the difference between a good investment and an expensive lesson. Xelox Properties can help you evaluate any deal.