Mezzanine finance rates: what it costs and what moves the price

The short answer

Mezzanine finance rates in the UK run indicatively from 12 to 18 percent a year, priced above senior debt because the mezzanine loan sits on a second charge and is repaid after the senior lender. Your rate depends on leverage, track record, profit on cost, sector and location. Judged on its own the number looks high, but blended across a senior plus mezzanine stack the combined cost of capital usually lands near 10 percent a year.

Mezzanine finance is a second-charge development loan that sits between your senior facility and your own equity, and its rate reflects exactly that position in the capital stack. Priced indicatively from 12 to 18 percent a year, mezzanine finance costs more than senior debt but far less than giving away equity in the scheme. This guide explains what drives the number, how fees stack on top, and why the rate on the mezzanine layer alone is the wrong figure to fixate on.

What does mezzanine finance cost?

As a working range, mezzanine finance rates fall indicatively between 12 and 18 percent a year. Where a specific loan lands inside that band depends on the risk of the individual scheme rather than any published tariff. A well-located residential scheme run by an experienced developer with strong profit on cost will price near the bottom; a first-time borrower on a more speculative site will price near the top, if the loan can be written at all.

It helps to hold two comparisons in mind. Senior development finance is cheaper, indicatively 7 to 9 percent a year, because it takes the first charge and the lower loan to cost. Raising the same money as equity is far more expensive, because an equity partner shares the profit rather than charging interest. Mezzanine finance sits between the two, which is the whole point of it.

Why mezzanine is priced above senior debt

The reason mezzanine costs more than senior debt comes down to security and repayment order. The senior lender holds a first charge over the development and is repaid first when units sell or the scheme refinances. The mezzanine lender holds a second charge and is subordinated, meaning it is repaid only after the senior debt is cleared. If a scheme underperforms, the mezzanine layer absorbs losses before the senior layer feels anything.

That subordinated position carries more risk, and the rate is the price of that risk. The relationship between the two lenders is set out in an intercreditor agreement, which governs the payment waterfall, enforcement rights and standstill periods. A mezzanine lender that knows the senior market can usually agree those terms quickly, which keeps the whole deal moving. You can see how the layers fit together in our guide on structuring a 90 percent plus loan to cost capital stack.

What moves your mezzanine rate

Five factors do most of the work in setting where inside the range a loan is priced:

Leverage. The higher the combined loan to cost, the thinner the equity cushion beneath the debt, and the higher the rate. A stack at 85 percent loan to cost prices more keenly than one pushed to 95 percent.
Track record. A developer with several completed schemes is a lower risk to a mezzanine lender than a first-timer. Demonstrable delivery history is one of the strongest levers on price.
Profit on cost. A scheme showing 25 percent profit on cost has more room to absorb overruns or a soft sales market than one at 15 percent, so it is priced more favourably.
Sector. Mainstream residential development is well understood and competitively priced. More specialist assets, or unusual planning positions, tend to carry a premium.
Location. A site in an area with deep, provable sales demand and recent comparable evidence supports a lower rate than one where the exit is harder to underwrite.

You can model how changing the leverage moves your equity requirement with our mezzanine leverage calculator, and see where demand is strongest in our UK development pipeline research.

Fees on top of the rate

The headline rate is not the only cost. Two fees are near universal in mezzanine lending:

Arrangement fee. Charged for setting up the facility, indicatively 1.5 to 2.5 percent of the loan, usually added to the facility rather than paid in cash up front.
Exit fee. Charged when the loan repays, and quoted either as a percentage of the loan or a share of the gross development value. Not every lender charges one, so it is worth checking.

On top of these you should budget for the usual third-party costs of any development facility: an independent RICS valuation, a monitoring surveyor, and legal fees for both sides. None of these are unique to mezzanine, but they belong in your appraisal.

Rolled-up versus serviced interest

Most mezzanine interest is rolled up rather than serviced. Rolled-up interest means nothing is paid monthly; the interest accrues and is settled in full when the scheme sells or refinances. That matters on a development, where there is no rental income during the build to service a monthly payment from. Rolling the interest up preserves cash flow through the programme and keeps the developer focused on delivery rather than debt service.

Serviced interest, paid periodically from other income, is less common on ground-up development but can appear on schemes with an income stream. Because rolled-up interest compounds over the term, a longer build costs more in absolute terms even at the same headline rate, which is one more reason a realistic build programme matters.

The blended cost is the number that matters

Read on its own, a 15 percent mezzanine rate looks expensive. Read in context, it usually is not, because the mezzanine layer is only a slice of the total funding. The figure that decides whether a deal works is the blended cost of capital across the whole stack.

Layer	% of cost	Indicative rate
Senior	65%	7.5% a year
Mezzanine	25%	15% a year
Equity	10%	n/a
Blended debt cost	90% funded	Near 10%

Illustrative only. Blended across senior at 7.5 percent and mezzanine at 15 percent, the combined debt cost on a 90 percent loan to cost stack lands close to 10 percent a year.

The trade is straightforward. You pay a higher blended rate than a low-leverage borrower, but you leave far less equity in the scheme, so your return on the cash you actually deployed is much higher. That is why experienced developers treat mezzanine as a tool for efficiency, not a last resort, as we set out in why developers use mezzanine finance.

How to get the best mezzanine rate

You improve your price the same way you improve your credit risk. Present a complete, credible appraisal: full planning permission, a professional cost plan and build programme, a realistic sales or refinance exit, and clear evidence of your track record. Keep the leverage no higher than the scheme genuinely needs, because pushing to the top of the loan to cost range costs you on rate. And bring the deal to a lender who understands the senior market, so the intercreditor agreement is agreed in days rather than becoming a source of delay and cost.

How we price

At Max Mezz we lend mezzanine finance from our own book and price each case on its merits, not a rate card. Where a scheme suits another funder better, we arrange it whole of market. Send us the site, costs, gross development value, senior terms if you have them and your track record, and we will come back with an indicative rate and a term sheet.

Frequently asked questions

What is the interest rate for mezzanine financing?

Mezzanine financing carries an interest rate of indicatively 12 to 18 percent a year in the current UK market. The exact rate depends on leverage, the developer's track record, profit on cost, the sector and the location. It is priced above senior debt because the mezzanine loan takes a second charge and is repaid after the senior lender, and most of the interest is rolled up and settled when the scheme sells or refinances.

Why is mezzanine more expensive than a senior loan?

Because it is subordinated. The senior lender holds the first charge and is repaid first, while the mezzanine lender holds a second charge and absorbs losses before the senior debt does. The higher rate is the price of taking that riskier position in the payment waterfall.

Do you always pay an arrangement fee and an exit fee?

An arrangement fee of indicatively 1.5 to 2.5 percent is near universal and usually added to the facility. An exit fee is common but not universal, so confirm whether one applies and how it is calculated before you sign a term sheet.