A 0.25 percentage-point increase in the interest rate charged on a fully drawn £250m development facility would add £625,000 to annual interest, according to an London Construction Magazine calculation. The same movement would add £250,000 on £100m of debt and £125,000 on £50m, before fees, compounding or changes in the amount actually drawn.
The calculation matters ahead of the Bank of England's next interest-rate decision on 5 November 2026. Bank Rate remains at 3.75%, but the Monetary Policy Committee voted 6-3 to hold it in September, with Megan Greene, Catherine L. Mann and Huw Pill voting for an increase to 4%.
Building works and scaffolding on Avery Row, Mayfair, London, October 2026. Photo: London Construction Magazine
London viability is already under pressure
The Bank's own business intelligence shows that the pressure is already reaching construction before any further rise in Bank Rate. Its October 2026 Agents' summary says construction remains weak, with private housebuilding particularly weak in London because of weak final demand. High borrowing rates, elevated costs and uncertainty are still weighing on investment.
The Bank also reports that credit remains widely available. The problem is demand for viable borrowing: developers are cautious about taking on new debt, and demand for new residential development finance is particularly weak. Some developers are seeking extensions to existing facilities where completed properties are proving difficult to sell.
That distinction is important for London's construction pipeline. A lender can be willing to provide capital while a developer still decides that a project does not generate enough return after finance, construction, regulatory and sales costs are included.
A quarter point becomes real money on a large scheme
LCM modelled a 25 basis-point increase in the all-in borrowing rate across three illustrative development facilities. The calculation does not assume that a Bank Rate increase would automatically pass through one-for-one to every development loan; individual facilities can be priced against Bank Rate, SONIA, swap rates, lender margins and project-specific risk.
| Development facility | Extra annual interest if fully drawn | Extra interest over 24 months at 50% average utilisation |
|---|---|---|
| £50m | £125,000 | £125,000 |
| £100m | £250,000 | £250,000 |
| £250m | £625,000 | £625,000 |
The numbers are small against total development value but material when an appraisal is already close to its minimum return. They also arrive alongside construction-cost pressure. BCIS reported in October that its General Building Cost Index was expected to show annual growth of 4.3% in Q3 2026, while the All-in Tender Price Index rose 3.2% over the same annual period.
That gap means contractors are absorbing or mitigating some input-cost increases because workloads remain subdued. BCIS said 77% of respondents to its Q3 tender-price panel described contractors as eager to tender, while chief economist Dr David Crosthwaite said "financing costs remain central to development decisions and what clients can afford to deliver".
The lending market is liquid but selective
Development finance is not disappearing. The latest Bayes Business School lending survey, published on 26 October, found £28.7bn of new UK commercial real-estate lending in H1 2026, 29% more than a year earlier.
Much of that activity is being driven by existing debt. Bayes said around £33bn of commercial real-estate loans were expected to mature during 2026, creating a large refinancing pipeline as borrowers prepare for the possibility of higher interest rates. Report author Dr Nicole Lux put the position plainly: "The striking feature of this market isn't a shortage of money. It's where that money is going."
Debt funds also became the largest source of residential and commercial development funding in H1 2026. Liquidity therefore exists, but lenders and borrowers are making different decisions according to asset quality, leverage, construction risk, sales prospects and the strength of the underlying scheme.
Planning consent still does not guarantee construction
London already has examples of the gap between permission and physical delivery. LCM's review of Canada Water and Lewisham found that two substantial south London regeneration programmes expected to provide future construction workload had been pushed back during October 2026 as viability and market conditions remained difficult.
The London Construction Intelligence Observatory recorded Canada Water Phase 2 as reportedly paused after revised masterplan approval and the Lewisham Shopping Centre redevelopment proposals as on hold when the dataset was verified on 31 October 2026. Those are project-specific positions, not evidence that interest rates alone caused either decision, but they sit inside the same post-planning viability gap being described by the Bank and BCIS.
The office market shows a similar separation between demand for finished space and willingness to start new structures. Savills reported in September that Central London development starts totalled 2.6 million sq ft by the end of Q3 2026. No new ground-up office scheme started during Q3, and less than 250,000 sq ft of ground-up development had started during the year to that point.
LCM has tracked this distinction throughout 2026 in its analysis of approved London projects that are not reaching mobilisation. Planning, funding, Building Safety approval where required, procurement and physical construction remain separate stages.
Mortgage costs feed back into residential starts
Higher rates also reach construction from the buyer side. The Bank's September Money and Credit figures show net mortgage approvals for house purchases falling to 53,400, compared with an average of about 58,800 over the previous six months. The effective interest rate on newly drawn mortgages increased to 4.63%.
For a housebuilder, slower reservations and weaker mortgage affordability affect more than sales revenue. Completed stock remains financed for longer, debt is repaid later and capital that could have been recycled into the next phase stays tied up. The Bank's Agents say housebuilders are continuing to use incentives to support volumes while new-build supply remains constrained by weak viability.
The market is splitting by funding model
Not every construction sector is exposed in the same way. The Bank's October intelligence describes substantial pipelines in nuclear, energy, utilities and defence, while manufacturing linked to energy infrastructure and domestic data-centre projects is growing. BCIS also reports stronger opportunities in data centres, utilities, defence and commercial refurbishment.
Private housebuilding and speculative development remain more dependent on the relationship between debt cost, sales or rental income and development value. That helps explain why London can simultaneously have contractors eager to tender, lenders willing to lend and a substantial planning pipeline, yet still record weak private starts.
The Bank of England's September minutes said inflation risks had become more tilted to the upside and recorded three votes for an immediate rise to 4%. The MPC's next Bank Rate decision is scheduled for 5 November 2026.
How LCM calculated this
LCM multiplied each illustrative facility size by 0.0025 to calculate the annual effect of a 25 basis-point increase where the full loan balance is outstanding. The second column models a separate 24-month scenario in which average utilisation is 50% of the stated facility, producing the same total sensitivity as one year at full utilisation.
The calculation is a financing sensitivity, not a forecast of a particular loan or a prediction that a Bank Rate move would pass through directly to development finance. It excludes arrangement fees, exit fees, lender margins, interest compounding, hedging, changing drawdown profiles and tax.
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