In good news for the residential development market, falling funding costs are helping to keep the sector healthy by making it easier for developers to refinance completed projects and maintain a steady flow of new schemes.
Developers typically rely on short-term, higher-cost loans to fund construction. Once a project is finished, that loan needs to be replaced with longer-term borrowing or repaid through sales. When refinancing is expensive, pressure builds at the worst possible moment — margins tighten, and sales can be rushed. When refinancing becomes easier, developers gain time to sell properly, which protects both projects and investor returns.
New analysis from Octane Capital suggests conditions are moving back in developers’ favour heading into 2026.
Swap rates moving lower
Octane compared average daily one- and five-year swap rates recorded so far this year with the same period last year, alongside movements over the most recent three months. Swap rates are a key part of how lenders price fixed borrowing, so changes feed directly into the cost of refinancing completed schemes.
So far this year, the average daily one-year swap rate has sat at 3.77%, while the average daily five-year rate has averaged 3.94%. That’s a marked reduction on last year’s equivalent period, when a one-year swap averaged 4.44%, and the five-year rate averaged 4.29% — declines of 0.67 and 0.35 percentage points respectively.
There is the same pattern for shorter timeframes, too. Over the last three months, the average daily one-year swap rate has reduced to 3.84%, down from 4.04% in the previous quarter. The five-year rate eased from 4.02% to 3.92%.
Falling inflation promises even lower rates
In practical terms, falling swap rates allow lenders to offer cheaper exit finance. For developers nearing completion, that lowers refinancing costs and reduces the risk of being forced into discounted sales simply to clear existing debt. For investors, it improves the chances that schemes will move through completion in an orderly way rather than under pressure.
The outlook for swap rates has improved further after January’s inflation came down faster than expected. The Consumer Prices Index fell from 3.4% in December to 3% in January, its lowest annual level since March last year. Markets are now pricing in a strong chance of a Bank of England base rate cut in March, with expectations of further easing later in the year.
Octane says this shift is particularly important for developers approaching the end of a project, where exit finance provides breathing space to sell units gradually or move onto longer-term funding structures without sacrificing value.
What it means for investors
When refinancing runs smoothly and margins are protected, it doesn’t just steady existing schemes — it helps keep the wider development cycle moving. Capital can be recycled more efficiently, funding lines remain open, and projects that may have stalled during tighter conditions are more likely to move forward. For investors, this supports a healthier pipeline and greater choice as new opportunities come to market.
Jonathan Samuels, CEO of Octane Capital, said:
“The reduction in average daily swap rates since the start of the year is a very encouraging sign and reflects the fact that the wider lending environment is continuing to stabilise.
“For developers, this has a direct impact on their ability to refinance completed schemes. Lower swap rates support more competitive exit finance pricing, which in turn gives developers greater flexibility and breathing space when it comes to repaying existing facilities and securing longer-term funding.
“After a challenging period where higher funding costs restricted refinancing options, we’re now seeing improving conditions that are helping to unlock projects and support delivery. Specialist finance plays a crucial role in that process, particularly when developers need speed, flexibility, and certainty to navigate the final stages of a scheme.
“As confidence continues to return and funding costs ease, the outlook for development activity and refinancing is becoming far more constructive as we move further into 2026.”
While borrowing costs remain above the ultra-low period earlier in the decade, easing refinancing pressure removes one of the biggest strain points in the development cycle. A smoother exit environment helps unlock stalled schemes, supports fresh delivery and reinforces the conditions needed for a steady flow of residential projects — ultimately giving investors a healthier market and more choice.
