Development and construction finance: from a house build to a multi-unit project.

A house build: progress payments against a contract

A residential construction loan funds a build in stages. The lender assesses the borrower, contract and security. Valuation, inspection and progress-payment requirements depend on the lender and loan. Victorian domestic building contracts are subject to statutory deposit and progress-payment rules. Different progress-payment schedules are possible in specified circumstances and should be checked with a building lawyer. Interest is generally calculated on drawn funds; repayment arrangements and other charges depend on the loan contract. Additional costs need funding arrangements agreed with the lender and any variation must comply with the building contract and applicable rules.

Lenders want a registered builder, a fixed price contract with a schedule of progress payments matching their stages, council approval, insurance and a realistic contingency. Owner-builders face far fewer lenders and lower loan ratios. Delays and cost overruns can create funding difficulties, so the plan should account for them.

Knockdown rebuild and where you live in the meantime

Knocking down an existing house to build new is funded like a construction loan with one difference: once the house is demolished, the security is land only, and the lender values it that way. Before demolition, confirm the lender’s consent, valuation basis and funding conditions for the existing loan and proposed build. Living costs during the build are the other half of the plan: rent elsewhere plus interest on the drawn balance, for a year or more. Bridging finance can carry a purchase or a build while an existing home is sold, for a limited period, at a higher rate and with a clear exit; it suits a defined gap, not an open one.

Where a build becomes a development

Two townhouses on a block you already own can sometimes be funded as a residential construction loan on your own income. The lender’s classification depends on the project, borrower and repayment strategy; dwelling count or entity type alone does not determine it. The lender now sizes the loan against the project rather than against your salary, and the questions become: what will it sell for, what will it cost, and how much of the sale is already contracted.

Gross realisation value, total development cost and the lower of the two

Gross realisation value is the estimated total sale value of the completed project. Confirm the valuation’s GST basis and the value the lender adopts. Total development cost is everything it takes to get there: land, construction, professional fees, council contributions, marketing, finance costs and contingency. Where both GRV and TDC limits apply, the lower calculated limit is one constraint; the lender’s other assessment requirements still apply. The borrower must fund any gap, with contribution and drawdown timing agreed under the facility conditions. The development feasibility tool on this site runs this working on figures you enter, with the method shown.

Presales, the quantity surveyor and capitalised interest

Presales convert the valuer’s opinion of GRV into signed contracts. Banks commonly require presales covering a proportion of the debt before construction funding is released, with conditions on who the buyers are, how much deposit they have paid and how many any one buyer can take. Private and non-bank lenders often require fewer or no presales in exchange for a higher price and a lower loan to cost, which is why smaller projects and fast starts often use them.

A lender may require quantity surveyor reports before progress payments, according to the facility’s drawdown conditions. Interest during construction is usually capitalised: added to the loan rather than paid monthly, and included in TDC from the start. Line fees, establishment fees and the cost of the QS and valuer are part of the finance cost, and a feasibility that leaves them out is not a feasibility.

Private lending, mezzanine and second mortgages

Private lenders fund what banks will not, or will not fund fast enough: land with a permit not yet issued, a project with no presales, a bridge until a sale settles, or a borrower whose financials are not ready. The price is higher, the term is shorter and the exit has to be defined, whether that is sales, a refinance to a bank once the project qualifies, or another realisation. Mezzanine finance and second mortgages add debt behind senior funding, subject to agreed priority, lender consent and facility conditions. Caveat loans are short-term loans where the lender lodges a caveat over the property: a caveat records a claimed interest in land and is not itself a mortgage, so the lender’s security, priority and enforcement depend on the underlying loan documents and legal position, and the arrangement needs legal assessment before it is signed. Each is a tool for a specific gap and a specific exit, not a substitute for equity.

Enquiries above $10 million

Development and portfolio enquiries above $10 million are handled through the $10m+ portfolio and development review, where Ian Webbe is the first point of contact and manages the relationship. The credit assistance on every file is provided by Dayan Kasturiratna.