A refurbishment opportunity can look highly profitable on paper, then stall when the lender’s contribution is lower than expected. Understanding what is loan to cost gives you a clearer view of how much cash a project will require before you commit – and whether the proposed funding structure leaves enough room for profit.
For investors, developers and landlords, loan to cost is one of the most useful measures for assessing the funding of a purchase, conversion or development. It is particularly relevant where a project involves more than simply buying a completed, mortgageable property.
What is loan to cost?
Loan to cost, commonly shortened to LTC, is the percentage of a project’s total eligible costs that a lender is prepared to finance.
The calculation is straightforward:
Loan to Cost = Loan Amount ÷ Total Project Cost × 100
Total project cost will usually include the purchase price or land cost, build or refurbishment budget, and certain professional, planning or finance costs. Exactly what counts is lender-specific. Some lenders will include interest and fees within the facility, while others expect these to be funded separately or retained from the loan.
If a lender offers 75% LTC on a project with eligible costs of £400,000, the maximum facility may be £300,000. You would need to contribute the remaining £100,000, plus any costs that sit outside the lender’s calculation and an appropriate contingency.
That distinction matters. A headline LTC figure is not necessarily the same as the cash you need to put into the deal.
Why loan to cost matters to property investors
LTC helps you answer a commercial question early: can this project be funded without putting too much of your own capital at risk?
For a straightforward buy-to-let purchase, loan to value may be the main measure. For a heavy refurbishment, flip, office-to-residential conversion or ground-up development, the initial acquisition is only part of the financial picture. The works, professional fees and timing of spend can have a significant impact on profitability.
A strong LTC can help preserve working capital for the next opportunity, unexpected works or a longer sales period. However, the highest available LTC is not automatically the best deal. Higher leverage can mean a higher interest rate, larger fees, tighter monitoring requirements or greater pressure on your exit if values soften.
The right level of borrowing depends on the project, your experience, available liquidity and how resilient the numbers remain if costs rise or the exit takes longer than planned.
A loan to cost example
Imagine you are buying a tired three-bedroom house for £200,000 with a £40,000 refurbishment programme. Legal fees, valuation, broker fees, planning advice and other eligible costs amount to £15,000.
Your total project cost is therefore £255,000.
If a lender agrees to provide 75% LTC, the maximum loan based on cost would be £191,250. In principle, you would need to provide £63,750 towards eligible costs.
But this is where property finance requires more than a quick percentage calculation. The lender may cap borrowing against the purchase price at a separate percentage, then release refurbishment funds in stages as work is completed. If the lender provides 70% of the purchase price on day one, you would initially receive £140,000 towards the acquisition. The remaining facility could be drawn against evidenced works, subject to inspections and conditions.
You still need enough capital to complete the purchase, pay upfront costs, start the works and manage timing gaps between each drawdown. A project can be viable overall while still requiring more day-one cash than an investor has allowed for.
Loan to cost versus loan to value and GDV
LTC is often discussed alongside loan to value, or LTV, and gross development value, or GDV. They measure different risks, and lenders commonly consider all three.
Loan to value compares the loan against the current value or purchase price of the property. On a £200,000 purchase with a £140,000 loan, the LTV is 70%.
Loan to cost compares the loan against the complete cost of delivering the project. It is more useful when material capital expenditure is required after purchase.
Loan to GDV compares development borrowing with the expected value of the completed scheme. If a development costs £1 million and has a projected GDV of £1.4 million, a £900,000 facility would be 90% LTC but roughly 64% LTGDV.
A lender will not rely on GDV alone. Forecast values can change, and a profitable-looking appraisal may be vulnerable if sales prices fall, build costs rise or planning is delayed. Equally, a generous LTC does not overcome a weak exit. The lender needs confidence in the property, the borrower, the budget, the proposed works and the route to repayment.
What costs can be included in LTC?
There is no single industry-wide definition of total cost. This is why comparing finance options only by the advertised LTC can be misleading.
Purchase price, land acquisition, build costs, refurbishment works, professional fees and planning costs are commonly considered. Depending on the lender and product, interest, lender arrangement fees, monitoring surveyor fees, legal fees, contingency and stamp duty may also be included or may need to be paid from your own funds.
For a development facility, the build budget will usually be reviewed by a monitoring surveyor. The lender wants to see a detailed cost plan, realistic programme and sufficient contingency. A lender may accept a proportion of the contingency in the cost calculation but will still expect you to have the financial capacity to deal with overruns.
Always ask for a clear schedule showing the gross facility, net day-one advance, retained interest, fees, drawdown profile and total cash contribution. Those figures are far more valuable than a single LTC percentage.
How lenders assess an LTC application
Lenders assess both the asset and the person delivering the scheme. A first-time developer converting a mixed-use building will be viewed differently from an experienced operator with completed projects of a similar scale.
They will examine the purchase rationale, valuation, comparable evidence, planning position, specification, contractor arrangements, build costs, contingency, credit profile and exit strategy. For refurbishment finance, the scope of works needs to be proportionate to the projected uplift in value. For development finance, the programme, procurement route and sales strategy receive even closer scrutiny.
Your exit is central. Will the property be sold, refinanced onto a buy-to-let or commercial mortgage, or retained within a portfolio? If refinancing is the plan, test the likely rental income, lender affordability requirements and future LTV rather than assuming the completed value alone will solve the repayment.
How to use LTC when assessing a deal
Before offering on a property, build your appraisal from the bottom up. Start with the purchase price, then include every foreseeable cost: works, labour, materials, professional input, planning, utilities, insurance, finance, selling costs and contingency. Do not treat the contingency as optional simply because the initial budget looks tidy.
Next, model a conservative funding position. Rather than assuming the maximum advertised LTC, consider what happens if a lender excludes certain costs, reduces the valuation or only releases works funds after inspection. Calculate your day-one cash requirement separately from your total equity contribution.
Then pressure-test the exit. A useful appraisal should still make sense if the project takes several months longer, the valuation comes in lower than expected or the works cost more than the original quotation. The goal is not merely to obtain finance. It is to protect the margin that justifies taking on the project.
When a lower LTC may be the better choice
Higher leverage can improve returns on cash invested, particularly where an investor has multiple opportunities in the pipeline. Yet borrowing to the limit can reduce flexibility. Retained interest may be higher, lender scrutiny may increase and a smaller buffer can turn a manageable issue into an expensive one.
A lower LTC with a cleaner structure can be preferable where the project is complex, planning is uncertain, the contractor is new to you or the local resale market is thin. It may also make sense to contribute more capital if doing so materially improves pricing or creates a safer refinancing position.
The right facility is the one that supports delivery, not simply the one with the largest headline figure. At Max Property Finance, the starting point is always the full project story: costs, timescales, experience, risks and exit. When those elements are aligned, loan to cost becomes a practical tool for moving decisively while protecting your long-term property profits.
