Development finance is a specialised form of lending designed to fund property construction and development projects. Unlike a standard home loan or construction loan for a single dwelling, development finance covers larger-scale projects such as multi-unit residential developments, land subdivisions, townhouse complexes, apartment buildings, commercial developments, and mixed-use projects.
These loans are structured differently from residential mortgages because of the unique risks and complexities involved in property development. The loan is typically short-term (12 to 36 months), interest-only during the construction phase, and repaid in full from the sale proceeds of the completed development or through refinancing to long-term finance.
Development finance is available from major banks, specialist non-bank lenders, private lenders, and mezzanine finance providers. Each type of lender offers different LVR limits, pricing, and approval criteria. The right lender for your project depends on factors including the development size, your experience as a developer, the level of pre-sales, and the project location.
Development finance covers a wide range of project types, each with different funding requirements and lender appetites.
Land subdivision: Purchasing a large parcel of land and subdividing it into smaller residential or commercial lots. This typically involves civil works including roads, drainage, utilities, and landscaping. Land subdivisions are generally viewed favourably by lenders as they involve less construction risk and can be staged to manage cash flow.
Townhouse and villa developments: Building multiple dwellings on a single site, typically ranging from 2 to 20+ units. These are the most common type of residential development project and are well understood by lenders. The key consideration is achieving adequate pre-sales to demonstrate market demand.
Apartment developments: Medium to high-density apartment buildings involving more complex construction, higher total costs, and longer build timeframes. These projects typically require more substantial pre-sales (often 80% or more) and experienced developers to secure bank financing.
Commercial and mixed-use: Office buildings, retail spaces, or mixed-use developments combining residential and commercial components. These projects often require specialist lenders and have different assessment criteria including tenant pre-commitments for the commercial space.
Development finance operates on a progressive drawdown structure, which differs significantly from a standard home loan. Here is how the process typically works from start to finish.
Site acquisition: The first drawdown covers the purchase of the development site (if not already owned). Some lenders will finance the land acquisition as part of the development loan, while others require you to purchase the land separately using a standard commercial loan or your own equity. Land is typically valued at the lower of the purchase price or independent valuation.
Pre-construction costs: Before construction begins, there are significant upfront costs including architectural and engineering fees, planning and permit applications, quantity surveyor reports, pre-sales and marketing costs, and legal fees. Some lenders include these in the facility, while others require them to be funded from equity.
Construction phase: During construction, funds are drawn progressively as work is completed. A quantity surveyor (QS) is appointed by the lender to inspect the project at each stage and certify that the work completed matches the claimed progress. Typical draw stages include slab completion, frame stage, lock-up, fit-out, and practical completion. Interest is charged only on drawn funds, which helps manage costs during the build phase.
Completion and repayment: Once construction is complete and certificates of occupancy are issued, the completed units are either sold to repay the loan or refinanced to long-term investment finance if you intend to hold them as rental properties. The loan must typically be repaid within the agreed term, which is usually 12 to 36 months from initial drawdown.
Development finance is more expensive than standard residential lending due to the higher risk and complexity involved. Here is a breakdown of the typical costs.
| Cost Component | Bank Lender | Non-Bank Lender | Private Lender |
|---|---|---|---|
| Interest Rate | 6-8% pa | 8-11% pa | 10-15%+ pa |
| Establishment Fee | 0.5-1% | 1-2% | 2-3% |
| Max LVR (TDC) | 65-75% | 70-80% | 75-85% |
| Pre-sales Required | 80-100% debt cover | 50-80% debt cover | Often none |
| QS Fees | Borrower pays | Borrower pays | Borrower pays |
A local developer approached us to finance a four-townhouse development on a site in Geelong West. The total development cost was $2.1 million, comprising $650,000 for the site, $1.2 million in construction costs, and $250,000 in soft costs and contingency. The developer had $630,000 in equity (30% of TDC) and two pre-sales totalling $1.15 million. We secured a development facility with a non-bank lender at 70% of TDC with an interest rate of 8.9% pa. The project was completed in 14 months, with all four units sold for a combined $2.7 million, generating a profit of approximately $600,000 before tax.
Securing development finance requires meeting several key criteria that lenders use to assess the viability and risk of your project.
Developer experience: Lenders want to see that you have successfully completed similar projects before. First-time developers may need to partner with an experienced developer or builder, or accept less favourable terms from lenders willing to fund less experienced operators. Building a track record of smaller projects before taking on larger developments is advisable.
Pre-sales: Bank lenders typically require pre-sales covering 80% to 100% of the debt amount before they will provide funding. Non-bank lenders may accept lower pre-sale levels or none at all, though this comes at a higher cost. Pre-sales demonstrate market demand and provide certainty of loan repayment.
Equity contribution: You will typically need to contribute 20% to 35% of the total development cost as equity. This can include the value of the land (if owned outright), cash, or cross-collateralised property. Lenders want to see that you have meaningful skin in the game to align your interests with theirs.
Planning approvals: Most lenders require at minimum a planning permit before they will consider the application. Having all necessary approvals in place, including building permits, significantly strengthens your application. Projects still in the planning approval stage are generally too early for most lenders to consider.
Fixed-price building contract: Lenders require a fixed-price building contract with a licensed and appropriately insured builder. The contract should include adequate allowances for variations and be reviewed by the lender’s quantity surveyor. Cost overruns are one of the biggest risks in development, so lenders want certainty on construction costs.
Always include a contingency of at least 5% to 10% of construction costs in your development budget. Unexpected costs arise in virtually every project, and having a contingency buffer prevents you from needing to seek additional funding mid-project, which can be both expensive and difficult to arrange.
Underestimating total costs: Development costs extend well beyond the land price and construction contract. Soft costs including council contributions, legal fees, marketing, interest capitalisation, and selling costs can add 15% to 25% to the total budget. Failing to account for these can create a funding shortfall during the project.
Overestimating end values: Overly optimistic sales price projections can make a project appear more profitable than it actually is. Lenders will commission their own independent valuations, and if these come in below your estimates, the loan amount may be reduced. Always use conservative, evidence-based valuations when planning your project.
Not securing finance early enough: Development finance takes longer to arrange than standard lending. Starting the finance process too late can cause costly delays to your construction timeline. Ideally, begin the finance process as soon as you have planning approval and a fixed-price building contract.
The development finance market in Australia includes several categories of lenders, each suited to different project profiles and developer experience levels.
Major banks: The big four banks and some second-tier banks offer the most competitive rates for development finance but have the strictest criteria. They typically require experienced developers with a proven track record, high levels of pre-sales (often 100% debt cover), strong equity positions, and projects in established locations with proven demand. Bank finance is best suited to experienced developers with straightforward projects.
Non-bank lenders: Specialist non-bank development lenders offer more flexibility than banks, often accepting lower pre-sale levels, less experienced developers, and more complex project structures. Their rates are higher (typically 8% to 11%) but they can move faster and are often more pragmatic in their assessment approach. Non-bank lenders are ideal for developers who do not quite meet bank criteria or need faster turnarounds.
Private lenders: Private or mezzanine lenders provide the most flexible funding but at the highest cost (10% to 15%+ interest plus significant establishment fees). They are typically used for projects that cannot secure bank or non-bank funding, or as a second-tier facility to top up a primary loan. Private lending can also be useful for site acquisition before planning approval is obtained.
Before seeking development finance, every project should begin with a thorough feasibility study. This analysis determines whether the project is financially viable and helps identify the optimal financing structure. A comprehensive feasibility study should include the following components.
Revenue projections: Realistic estimates of end sale values based on comparable sales in the area. It is important to use conservative figures and consider potential market changes during the construction period. Getting an independent valuation of the proposed end product provides the most reliable revenue estimate.
Cost analysis: A detailed breakdown of all project costs including land acquisition, stamp duty, construction costs (from a quantity surveyor or builder quotation), professional fees (architect, engineer, surveyor, legal), council contributions and permits, marketing and selling costs, finance costs (interest, fees), and a contingency allowance of at least 5% to 10%.
Profit and risk analysis: The difference between total revenue and total costs gives you the gross development profit. Most developers target a minimum profit margin of 15% to 20% on total development cost, which provides a buffer against unexpected costs or market softening. Your feasibility should also include sensitivity analysis showing how changes in construction costs, sales prices, or timing affect the bottom line.
Regional Victoria, particularly areas like Geelong, the Surf Coast, Ballarat, and Bendigo, has seen strong population growth and housing demand in recent years. This has created significant opportunities for property developers, but also unique considerations when seeking finance.
Lenders assess regional development projects carefully, looking at local demand drivers, population growth trends, comparable sales evidence, and the depth of the local property market. Projects in regional centres with strong employment, infrastructure investment, and population growth (such as Geelong) are generally well supported by lenders. More remote locations may face additional scrutiny.
Construction costs in regional areas can differ from metropolitan Melbourne. While land costs are typically lower, builder availability and material transport costs can be higher. It is important to obtain accurate local construction quotes and factor these into your feasibility study. At Mortgage & Finance Advisory, we have deep local knowledge of the Geelong and Surf Coast property markets and can help you connect with lenders who understand the growth potential of regional Victoria.
Yes, though your options may be more limited and terms less favourable. First-time developers can improve their chances by starting with smaller projects (such as a duplex or triplex), partnering with an experienced builder, providing a larger equity contribution, and working with a broker who can present your application to lenders open to less experienced developers.
TDC (Total Development Cost) is the total cost to complete the project including land, construction, fees, and interest. GRV (Gross Realisation Value) is the total expected sales revenue from the completed development. Lenders use both metrics to assess risk. A typical bank might lend 65-75% of TDC or 60-70% of GRV, whichever is lower. These ratios help ensure the project has adequate profit margin and equity buffer.
Development finance approval typically takes four to twelve weeks depending on the lender and project complexity. Bank approvals tend to take longer (eight to twelve weeks) due to more rigorous assessment processes, while non-bank and private lenders can often provide approvals in four to six weeks. Having all documentation prepared and submitted upfront can significantly reduce approval timeframes.
If you are demolishing an existing dwelling and building two or more new dwellings on the site, this would typically be classified as a development project and require development finance. However, a single knockdown-rebuild (demolishing one house and building one new house) can usually be funded with a standard construction loan, which offers simpler terms and lower costs.
Our experienced brokers compare options across 60+ lenders to find the right solution for your situation.
Director & Senior Finance Broker
With years of experience in mortgage broking and finance, Melanie helps clients across Geelong, the Surf Coast, Melbourne and regional Victoria navigate the complexities of home loans and business finance. Contact our team on 03 9020 2699.
