Loan to Cost (LTC) Explained: The Development Cost Cap

What Loan to Cost Is

You’ll meet Loan to Cost (LTC) as the ratio of your development loan to the total cost of the project: land plus build plus professional and other costs. It’s the main metric a lender uses to size its exposure during construction, which is what makes it the number deciding how much of your own money goes in before any of theirs does.

The loan you actually get is set by both ratios, never by one. LTC caps it against what you spend, loan-to-GDV caps it against the finished value, and both bite at once, so between them they decide how much of the build your own cash flow has to carry. Read either ratio in isolation and you’ll overestimate what a lender is going to advance.

How LTC Is Calculated

You divide the total loan by total project cost and multiply by 100, so a £2,000,000 scheme funded with a £1,400,000 loan sits at 70% LTC. Total cost pulls in land, the build contract, professional and planning fees, finance costs and a contingency of usually 5 to 10%.

Your own profit never enters that sum. Profit is the return you take at the end rather than a cost you incur along the way, so it can’t inflate the cost base and it can’t lift the loan, however much better the appraisal would look if it did. What sets the ratio is the schedule of costs your quantity surveyor agrees, and before your surveyor signs that schedule off, the number you’re planning your cash flow around is still an estimate.

Why LTC Matters to Lenders

You fund whatever the LTC doesn’t. At 75% LTC you contribute 25% of all project costs as equity, and that equity is the lender’s first-loss buffer: if costs overrun or the scheme stumbles, your money absorbs the hit before theirs.

Most senior lenders stop at 70 to 75%, stretch senior debt reaches 80 to 85%, and past 85% you’re into mezzanine finance or fresh equity. Every step up costs more, because every step up leaves the lender further out on the same scheme, so the question worth asking is not how high you can get the ratio but whether the extra rate at 80% beats tying up more of your own money at 70%. When the sale runs later than the appraisal assumed, it’s your equity sitting in the ground and your own cash flow carrying the interest on the rest.

Loan to Cost vs Loan to Gross Development Value: Both Caps Apply

You’re constrained by two limits at once, and the loan is the lower of them. The LTC cap holds the loan against total costs; the loan-to-GDV cap holds it against projected completed value. Whichever calculates smaller is the one that binds, and there’s no arguing the other one up to meet it.

The tighter cap is the one that costs you. Your margin decides which of the two that is: a strong scheme, with low costs relative to GDV, is usually limited by LTC, while a thin-margin scheme hits the loan-to-GDV cap first. On £2m of costs and a £3.5m GDV, the 75% LTC cap of £1.5m binds below the 65% loan-to-GDV cap of £2.275m, so £1.5m is the figure to plan your cash flow around, whatever the end value suggests you could have borrowed.

LTC and the Drawdown Process

You don’t get the whole loan on day one. The lender holds the ratio to its limit throughout, advancing in tranches as certified costs are incurred, so the balance grows with the build and the ratio is tested again at every drawdown request rather than signed off once at the start.

A cost overrun costs you twice. If actual costs run past budget the LTC can be breached, and the answer is a demand for extra equity or fresh lender consent before the next tranche releases; when your contractor invoices ahead of the monitoring surveyor’s visit, the shortfall sits in your own cash flow until the drawdown catches up. Overspending quietly is not something the structure allows.

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