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mezzanine finance rates ukMezzanine Finance Rates in the UK: What You Will Really Pay
By James Dawes, CeMAP, Founder, James William & Co Capital
Mezzanine finance is priced well above senior debt, because the lender sits behind the bank and takes more risk. In the UK, published guides commonly quote headline rates starting at around 12% a year and running higher for riskier schemes, usually with an arrangement fee and an exit fee on top. The headline rate is only part of the cost. How interest is charged, which fees apply and how much of the senior facility you are stretching all change what you actually repay.
This guide explains how mezzanine pricing is built, what sits behind the number you are quoted, and how to judge whether the extra cost is worth it on your scheme.
TL;DR
- Mezzanine is subordinated debt that sits between the senior loan and your equity, so it costs more than senior finance.
- Expect quoted rates to start in the low double digits annually, or around 1% a month, plus arrangement and exit fees. Exact terms depend on the deal.
- Interest is usually rolled up and repaid at exit, which means the total cost depends on the term and on whether it compounds.
- Leverage, scheme risk, sponsor track record and the senior lender’s consent are the main drivers of your rate.
- Judge mezzanine on the return it adds to your equity, not on the rate alone.
Table of Contents
- Where mezzanine sits and why it costs more
- Typical mezzanine finance rates in the UK
- What drives the rate you are offered
- Fees and costs beyond the headline rate
- How interest is charged: rolled up, serviced or retained
- Is mezzanine worth the cost?
- What mezzanine lenders ask for
- Our perspective
- Getting a mezzanine quote
- Frequently asked questions
- Sources
Where mezzanine sits and why it costs more
A UK property funding structure is usually built in layers. The senior lender takes the first charge and is repaid first. Your own equity sits at the bottom and takes the first loss. Mezzanine fills the space between the two.
The Development Bank of Wales guide to mezzanine finance describes it as a hybrid of debt and equity that is subordinated: it is repaid only once the senior lender has been repaid in full, but it ranks ahead of common equity. That ranking explains the pricing. If a scheme underperforms, the mezzanine lender is exposed to losses before the senior lender is, so it charges for it.
The British Business Bank makes the same point from the lender side in its Small Business Finance Markets report: private-debt margins run higher than bank finance because the products are bespoke and fund riskier borrowers, and subordinated security adds equity-like risk. Mezzanine is priced somewhere between a bank loan and an equity return, and the more equity-like the risk, the closer it moves to the equity end.
If you want the wider picture of how these layers combine, our guide to types of property finance for UK developers sets out each tier.
Typical mezzanine finance rates in the UK
There is no base-rate-plus formula for mezzanine. Each lender prices the deal individually, so any range you read is a guide to where quotes tend to land, not a tariff. Lenders and brokers who publish figures commonly describe:
- Headline interest: from around 12% a year on the lower end, often higher where leverage is stretched or the scheme is more complex. Some lenders quote this monthly, around 1% a month and upwards.
- Arrangement fee: commonly in the region of 2% of the facility.
- Exit fee: commonly around 1% of the facility, charged on repayment.
- Term: usually short, in line with the build and sale or refinance period, rather than a long amortising term.
Treat those as orientation only. We do not publish a rate card, because pricing moves with the lender, the deal and the market on the day. What follows explains why quotes differ so much, so you can see where your own scheme will fall.
Development schemes versus business and acquisition finance
Property development mezzanine is secured against the scheme, usually by a second charge, and repaid from sale proceeds or a refinance. Business or acquisition mezzanine is different. It is often unsecured against property, may carry a warrant or equity kicker, and is repaid from the cash flow of the business. The Development Bank of Wales notes that some business mezzanine agreements allow the lender to convert outstanding debt into an equity stake if the business cannot service it. That conversion right is part of the price you pay, even where the cash interest looks lower.
So when you compare two quotes, check whether you are comparing like with like. A lower coupon with an equity share attached can cost more than a higher coupon on a pure debt basis.
What drives the rate you are offered
Five factors do most of the work.
- Combined leverage. The higher the senior and mezzanine loans together reach as a proportion of cost or value, the thinner your equity cushion and the higher the price. A mezzanine layer that takes total debt to a moderate level costs less than one that pushes it to the edge of what lenders will accept.
- Scheme risk. Ground-up development carries planning, build cost and sales risk. A light refurbishment with a clear exit is cheaper to fund than a speculative build in a thin market.
- Sponsor strength. A developer with completed schemes of similar size, a clear balance sheet and a credible team will be priced more keenly than a first-time sponsor. Track record is often the biggest single lever.
- Exit strategy. A pre-sold scheme or a refinance onto a term lender that is already indicated is easier to price than an exit that depends on the open market.
- The senior lender’s terms. Mezzanine can only be placed if the senior lender agrees. The two lenders usually sign an intercreditor agreement or deed of priority that sets out who can be paid, who can enforce and when. A restrictive senior lender can limit what the mezzanine lender will do, and that feeds into pricing.
Our article on how to structure a development finance deal when margins are tight looks at how these elements interact when the numbers are close.
Fees and costs beyond the headline rate
Two mezzanine loans with the same coupon can differ by tens of thousands of pounds once everything is added. Ask for a full costs breakdown that covers:
- Arrangement or product fee, often added to the loan and charged on the whole facility.
- Exit fee, payable on redemption.
- Broker fee, where one applies, which should be disclosed to you up front.
- Lender legal fees and valuation costs, which you typically pay whether or not the deal completes.
- Your own legal costs, including the work on the intercreditor agreement, which is more involved than on a single-lender deal.
- Monitoring or drawdown charges, if the lender uses a monitoring surveyor on a staged build.
- Default interest and extension fees, which matter if the scheme overruns.
Read the term sheet for what happens at the end of the term. Extension fees and higher default rates are where an otherwise reasonable loan becomes expensive.
How interest is charged: rolled up, serviced or retained
Most development mezzanine does not ask you to pay monthly interest during the build, since the scheme is not producing income. Interest is usually rolled up or retained, and the fees and interest for the term are often added to the facility amount. Rolled-up interest is simple to manage but it raises the balance the lender is charging interest on.
HMRC’s guidance on beneficial loans makes the underlying point plainly: capitalised or rolled-up interest increases the outstanding principal, and compound interest is then charged on that higher amount. Whether your mezzanine compounds monthly, quarterly or not at all is therefore a pricing term in its own right. Ask for it in writing.
A worked example
This is an illustration of the arithmetic, not a quote. Suppose a developer takes a £500,000 mezzanine facility for 18 months at 1.25% a month, with a 2% arrangement fee and a 1% exit fee.
| Cost element | Simple interest | Monthly compounding |
|---|---|---|
| Interest over 18 months | £112,500 | about £125,300 |
| Arrangement fee (2%) | £10,000 | £10,000 |
| Exit fee (1%) | £5,000 | £5,000 |
| Total cost of the layer | £127,500 | about £140,300 |
The same headline rate costs roughly £12,800 more if it compounds. Over a longer overrun, the gap widens. That is why we look at the repayment figure at exit, not just the rate.
Is mezzanine worth the cost?
The right test is the return on your equity, not the price of the debt. Mezzanine is expensive money used to reduce the equity you commit, so the question is what that freed equity earns elsewhere and whether the scheme still makes its margin after the extra cost.
Here is a simple way to work it through:
- Model the scheme profit with senior debt and your full equity.
- Model it again with a mezzanine layer, deducting the full cost of that layer, including fees and rolled-up interest.
- Compare profit as a percentage of equity committed in both cases.
- Stress the second case: add three to six months of delay and a modest fall in sales values. If the margin disappears, the structure is too tight.
Mezzanine tends to make sense when the margin is healthy, the exit is clear and your equity is better used on a second scheme. It tends not to make sense when the scheme only works on optimistic sales values, or where a joint venture partner or a larger equity cheque would give you more room. Our guide to why use development finance in the UK covers the alternatives to compare.
What mezzanine lenders ask for
Conditions vary, but a mezzanine lender will usually want to see:
- A senior facility agreed or in place, with the senior lender’s consent to the second layer.
- A detailed appraisal with build costs, programme, sales values and a sensitivity analysis.
- Evidence of planning consent, or a clear route to it, for development schemes.
- A sponsor track record, a schedule of assets and liabilities, and proof of your own equity contribution.
- A realistic exit route, with a fallback if sales are slower than planned.
- Security: normally a second charge over the property, often with a debenture over the borrowing company and a personal or corporate guarantee.
If you are using an offshore or overseas vehicle, expect extra due diligence. Our piece on non-resident developer finance in England explains how tax and anti-money-laundering checks can slow a deal and how to prepare for them.
Our perspective
Most of the mezzanine deals we see are not won or lost on the rate. They are decided by whether the layers fit together. A keen mezzanine price is little use if the senior lender will not sign the intercreditor terms, or if the exit is thin enough that the rolled-up interest eats the margin.
We work with a network of specialist lenders, private credit funds and family offices, and we see how the same scheme can be priced very differently depending on who is asked and how the proposal is presented. A clear appraisal, a credible exit and a sponsor profile that matches the lender’s appetite usually move the terms more than negotiation on the last half a percent.
Our advice to developers is consistent. Start with the total cost of the layer at exit, test it against delay, and ask whether a joint venture partner or a stretched senior facility would give you a safer structure. Mezzanine is a tool for making equity work harder, and it works best when it is one deliberate part of the stack rather than a patch for a gap discovered late.
— James William Dawes
Getting a mezzanine quote
If you have a scheme in mind, we can structure the senior and mezzanine layers together, approach lenders that suit the risk profile and negotiate terms on your behalf, with one point of contact from first appraisal to drawdown. Our development finance, mezzanine and joint venture equity service is the place to start, and our development finance lender panel shows the range of lenders we can approach. If you are comparing structures, our article on the shifting development finance landscape and stacking debt is a useful companion.
Bring the appraisal, the planning position, a summary of your track record and your target exit, and we can tell you quickly what is realistic.
Frequently asked questions
What is a typical mezzanine loan rate in the UK?
Quotes commonly start from around 12% a year, or roughly 1% a month, and rise with leverage and scheme risk. Arrangement and exit fees are normally added. The only reliable figure is a term sheet for your own scheme.
Is mezzanine finance more expensive than a second charge bridging loan?
Not necessarily. Both rank behind the senior lender, and pricing depends on the risk, the term and the lender. The difference is usually structure: mezzanine is built into a development stack with an intercreditor agreement, while bridging is typically shorter and used to complete quickly. See our bridging finance page for how that product works.
Does mezzanine interest have to be paid monthly?
Often it does not. On development schemes, interest is commonly rolled up or retained and repaid at exit, which is why the total repayment can be much higher than the headline rate suggests. Check whether it compounds.
Can the lender take equity in my business?
On some business mezzanine agreements, yes. The Development Bank of Wales notes that a lender may be able to convert debt into an equity stake if the business cannot service it. Property development mezzanine is usually secured on the scheme instead, but read the terms carefully either way.
Do I need a broker to arrange mezzanine?
You can approach lenders directly, but many mezzanine providers work mainly through intermediaries, and the senior and mezzanine terms need to be negotiated together. A broker with access to the right lenders can save time and show you how competing structures compare.
Sources
- A guide to Mezzanine Finance, Development Bank of Wales
- Small Business Finance Markets 2014, British Business Bank
- EIM26251 Beneficial loans, HMRC Employment Income Manual
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