Higher for longer: what the Budget means for live development loans

Yesterday’s Budget headlines were about landlords and first-time buyers. For anyone holding development loans, the more important story is in the OBR’s numbers. The OBR now expects Bank Rate to average around 4% across 2026 and 2027, up from the 3.4% it assumed in March. Bank Rate is 3.75% today and markets expect a rise next week. Many of the loans on lenders’ books were priced and underwritten on very different assumptions.

I spend most of my week on site and in drawdown reports for lenders. This is what I think the Budget means for live schemes, and what I would do now if I ran a development loan book.

What changed

Little in the Budget was aimed at development viability. The measures that matter to lenders are mostly indirect.

• Rates stay higher for longer. Funding costs rise and interest cover tightens. Refinancing at the end of a term gets harder, particularly for loans written in 2023 and 2024.

• Fewer homes and slower sales. The OBR has cut its forecast for net additions to the housing stock by 190,000 over the forecast period. It expects house prices to grow by around 2% this year and 2.5% next, which is below inflation.

• Higher tax for landlords. Property income tax rises to 24%, 44% and 49% from April 2027, four points above today’s rates. More small landlords will sell, and rental-led exits will come under more pressure.

• Your First Home. A £4.7bn equity loan scheme for first-time buyers of new-build homes, with a 2.5% deposit and a 20% loan. The first loans are not due until April 2027. Buyers are likely to wait for it, which will slow sales in the meantime.

• A pause on building regulations. There will be no further major changes this parliament except where safety-critical. That helps cost certainty, although Gateway 2 and the golden thread still apply.

Where live loans are exposed

None of this is a crisis on its own. Together it changes the risk on loans that are already drawn. On a stressed scheme the problems rarely arrive one at a time. Slow sales stretch the programme and the programme overruns the loan term. The contractor’s margin disappears on a fixed-price contract signed two years ago. By the time anyone revisits the exit valuation, the headroom that looked comfortable at credit committee has gone.

I would look at these first:

• Exit values. GDVs set when rates were lower and investor demand was stronger, especially on schemes that rely on bulk sales to landlords or build-to-rent buyers.

• Cost to complete against facility headroom. Tender prices are firm, inflation is above target and the National Living Wage rises again in April. A contingency that was adequate at day one may not be now.

• Programme against loan term. Every month of delay costs interest, and slower sales lengthen the tail after practical completion.

• Contractor and consultant health. We have already seen designers and contractors on schemes we monitor fail or reappear under new names. Smaller firms on thin margins are the most exposed, and they build many of the schemes specialist lenders fund.

• Refinance and exit routes. Development-exit and term lenders will price harder, so the refinance assumed at completion needs another look.

What I would do now

Lenders come through periods like this best when they look across the whole book early, before individual loans start showing problems.

Start with a quick review of every live loan, testing cost to complete, programme and exit value against today’s assumptions and ranking the loans by risk. Most of the information is already in the monitoring reports, drawdown schedules and valuations you hold. It needs reading together.

Then expect more from monthly reporting. A monitoring report that says “all fine” every month is only useful if it tests the numbers. I would ask monitors to restate cost to complete against the remaining facility at every visit and to challenge the exit value whenever the market moves. Contractor solvency concerns should reach you as soon as they appear.

Loans already in difficulty

When a scheme stalls, the options narrow quickly. Deciding who completes it and at what cost is far easier with independent evidence in hand, so have a plan for those loans now.

Where the opportunity is

Your First Home will help SME developers with the right product in the right locations once the scheme’s caps are known. The extra £1.5bn for social and affordable housing will support registered providers and S106 delivery. Lenders who know which borrowers can move into that market will be well placed when activity picks up. On the OBR’s forecasts, that is more likely late in 2027 than early.

If you would like to talk through what this means for your book, or how a portfolio review would work, I am happy to have that conversation.

Joe Garner MRICS, Director, Axo Consulting

Axo Consulting is a firm of chartered surveyors providing development finance monitoring, cost management and development advisory services to lenders, investors and developers. This article reflects Budget-day announcements and the OBR’s October 2026 outlook. It is not tax or financial advice.