Key Takeaways
- Development finance typically covers 60-80% of total development costs (TDC)
- Presale requirements vary from 0% to 100% depending on lender and project
- First-time developers often need higher equity (40-50%) than experienced developers
- Interest is usually capitalised during construction, reducing cash flow burden
- Alternative lenders can fund projects that major banks decline
- Project feasibility and exit strategy are critical to approval
Development finance is specialist funding designed to help property developers purchase land and fund construction of residential, commercial, or mixed-use projects. Unlike standard home loans, development finance is structured around project milestones with funds released progressively as construction advances.
At Mortgage & Finance Advisory, we help developers across Victoria access funding for projects ranging from dual occupancies to large-scale unit developments. With access to over 40 development lenders including banks, non-banks, and private funders, we find solutions for projects at every stage.
How Development Finance Works
Development finance differs from standard lending in several important ways. The loan covers multiple cost components including land acquisition, construction costs, professional fees, and interest during the build period. Funds are released in stages aligned with construction progress, verified by a quantity surveyor or valuer.
Loan to Value Ratio (LVR) Structures
Development LVR can be calculated in different ways:
- LVR on Total Development Cost (TDC): Most common measure, typically 65-80%
- LVR on Gross Realisation Value (GRV): Based on end value, typically 55-70%
- LVR on As-If-Complete Value: Based on completed project value
Use our Development Feasibility Calculator to model your project.
| Criteria | Major Bank | Non-Bank | Private Lender |
|---|---|---|---|
| Max LVR (on TDC) | 65-70% | 70-75% | 75-80% |
| Presales Required | 80-100% | 50-80% | 0-50% |
| Experience Required | 3+ projects | 1-2 projects | Flexible |
| Typical Rate | 7-9% | 9-12% | 12-18% |
| Approval Time | 6-8 weeks | 3-4 weeks | 1-2 weeks |
Types of Development Finance
Land and Construction Finance
The most common structure, combining land purchase with staged construction funding. The lender takes security over the land and releases construction funds as the project progresses. Ideal for developers purchasing sites to develop.
Construction-Only Finance
For developers who already own land outright. Only construction costs are financed, often at better rates due to the developer's existing equity position. See our construction loans guide for owner-builder options.
Residual Stock Finance
Funding for unsold units after practical completion. This allows developers to refinance out of higher-rate construction debt while waiting for sales to complete. Rates are typically lower than construction finance.
Mezzanine Finance
Second-ranking debt that sits behind senior (first mortgage) debt. Used to reduce the equity required from the developer. Higher cost but can make projects viable when equity is constrained.
Presales Explained: A 100% presale requirement means all units must be pre-sold before first drawdown. Some private lenders fund with zero presales, accepting higher risk for higher returns. The trade-off is interest rate - expect to pay 3-5% more for no-presale facilities.
What Lenders Assess
Project Feasibility
Lenders analyse your feasibility study including land cost, construction budget, contingency, professional fees, interest, and expected end values. Most require a minimum 15-20% profit on cost for the project to be considered viable.
Developer Experience
Your track record significantly impacts available options. First-time developers may be limited to smaller projects or need joint ventures with experienced operators. Having completed even one successful project opens many more doors.
Builder and Professional Team
Lenders assess your builder's financial strength, track record, and insurance. They also review your architect, project manager, and quantity surveyor credentials. Using tier-one professionals strengthens applications.
Exit Strategy
A clear, realistic exit strategy is essential. This might be selling all units, retaining for rental, or refinancing to investment loans. Lenders want confidence the debt will be repaid.
Cost Overrun Risk
Most development loans include a 5-10% contingency allowance, but developers should maintain additional reserves. Cost overruns beyond contingency may require additional equity injection, which can derail projects if funds aren't available.
Client Success Story
A first-time developer in Geelong secured $2.8M funding for an 8-unit townhouse project with only 30% presales. By using a non-bank lender comfortable with newer developers and strong feasibility numbers, we achieved approval where three major banks had declined due to presale requirements.
The Development Finance Process
- Feasibility Assessment: We review your numbers and identify suitable lenders
- Application Preparation: Compile documentation including feasibility, plans, builder quotes
- Credit Assessment: Lender reviews project and developer credentials
- Valuation: Independent valuation of land and as-if-complete value
- Formal Approval: Credit approval with conditions
- Legal Documentation: Loan contracts and security documents
- Settlement/First Drawdown: Land purchase or first construction draw
- Progress Draws: Staged releases as construction progresses
- Practical Completion: Final draw on completion
- Sales/Exit: Repay debt from sales or refinance
Frequently Asked Questions
Most lenders require 25-40% equity contribution based on total development cost. First-time developers often need 40-50%. This can be cash, unencumbered land equity, or a combination. Mezzanine finance can reduce equity requirements but adds cost.
Yes, some private lenders fund projects with zero presales, particularly for experienced developers with strong track records and projects in desirable locations. Rates are higher (typically 14-18%) but can make sense for confident developers in rising markets.
Major banks: 6-8 weeks. Non-bank lenders: 3-4 weeks. Private lenders: 1-2 weeks. Complete documentation and a well-prepared feasibility study significantly speed all timeframes. Last-minute applications for unconditional settlement are very difficult.
Cost overruns beyond contingency typically require additional equity from the developer. This is why adequate contingency (minimum 5%, ideally 10%) and realistic budgeting are essential. Some facilities include cost overrun provisions, but these are rare and expensive.
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