Most people buying a property to develop aren't using a normal mortgage. Lenders won't lend on something that isn't habitable, and they won't lend to someone planning to sell within a year. So you end up with development finance or a bridging loan instead.
It's short term, secured on the property, and it costs a lot more than a mortgage.
Rates are usually quoted monthly rather than annually, which is the first thing that trips people up. Something quoted at 0.85% a month is just over 10% a year. Typical bridging at the moment sits somewhere around 0.75% to 1.2% a month depending on the deal, your experience and how much you're putting in yourself. Development finance for bigger schemes with staged drawdowns can be structured differently again.
Then there are the fees, and there are more of them than you'd think. An arrangement fee of 1% to 2% of the loan. A valuation fee. Legal fees, usually both yours and the lender's. Sometimes an exit fee when you repay. Together those can add another 2% to 3% of the loan before you've paid a penny of interest.
On a £200,000 loan over nine months at 1% a month, you're looking at roughly £18,000 of interest plus maybe £6,000 of fees. £24,000 gone, on a job where your profit might be £50,000.
Most lenders won't fund the whole thing. Expect to put in 25% to 30% of the purchase yourself, and on refurbishment work the build money often comes in stages as the work completes, with a monitoring surveyor signing off each stage. That's fine, but it means your own cash goes in first.
Interest is often rolled up rather than paid monthly, so it accrues and comes off at the end. That helps cashflow while the job's running, but it also means the debt grows every month the project runs late. A three month overrun on that example costs another £6,000.
Which is really the point. Finance is the cost most directly tied to how long the job takes, and it's the one that quietly punishes you for delays. Everything else is fixed the day you agree it.
If you're paying cash, none of this applies, and that's a genuine advantage that doesn't get talked about enough. Your money's still tied up and not earning elsewhere, but you're not paying anyone for the privilege and you're not on a clock.
Avalor estimates finance at 6.5% of the purchase and build by default, which is a reasonable flat assumption for a shorter job. If you've been quoted a rate you can put your own in, and if you're funding it yourself you can take it out entirely and see what that does to the numbers.