In the world of property development, the difference of just one tenth of a percentage point in interest rates can be a deciding factor, which is why comparing the fine details of property development loans is so important. Savvy can help you make sound financial decisions by taking the hard work out of comparing loans, helping you find and access the best deal for you.
Property development loans are loans which help finance the construction of multiple living units on one property title, such as townhouses, duplexes, apartments or units. They cover the construction of up to four separate dwellings. Property development finance loans start at around $500,000 and go upwards of $3 million, depending on the size and type of the proposed development. You can usually borrow up to 80% of the total cost of the project for smaller developments (two dwellings), or 70% for larger developments of three or four dwellings.
They differ from standard home loans in that funding for the development project is released in stages as construction progresses. They also come with a greater potential borrowing capacity in many cases, although you won’t be able to apply for low deposit loans in the same way as you would for residential property. As part of the application process, you’ll have to provide more detailed documentation surrounding the development than you would for an owner-builder loan due to the scale of the project (especially your experience with similar previous projects).
If there are more than four units in your proposed development, you’ll need to apply for a commercial property development loan. These will not only attract a higher interest rate, but have more stringent lending criteria and require substantially more paperwork (such as council development approvals) to be provided by the borrower to gain approval.
Home loans to develop rural property also come with different requirements compared to purchasing metropolitan land. Similarly, home loans for rural property developments attract a higher interest rate and have stricter lending criteria (such as a higher deposit requirement) than mortgages for residential property developments.
Property development loans are often fixed term, fixed rate loans which are released in stages as the development progresses. They are similar to construction loans, with payments being made as certain vital development milestones or stages are reached. These stages can be summarised as:
The concept of cross collateralisation means using the available equity in more than one property to finance the purchase (or in this case the construction) of another property or properties. The advantage of cross collateralisation is that it gives you access to free equity from more than one source and provides the lender with additional security.
The disadvantage is that your various properties are tied together as security for loans, so a default on the mortgage on one property can result in the linked properties being used as security having to be sold. It also makes refinancing more difficult, as it’s more difficult to refinance just one property in isolation when that one property is used as security for another loan or loans.
An example of cross collateralisation
A couple in Melbourne gets approved for a $640,000 loan to buy a property worth $800,000. They have sufficient equity to provide a 20% deposit, so they don’t have to pay Lenders Mortgage Insurance (LMI). After ten years living in this home, they’ve paid off $400,000 of their loan, so they decide to buy an investment property worth $600,000.
Since their mortgage is now only $240,000 on a property which has increased in value over the last decade to $1 million, they have plenty of free equity to provide as security for their negatively geared investment property. They decide to use $180,000 of their usable equity as a 30% deposit for their investment property, meaning they are eligible for some of the lowest interest rates available.
Five years later, they decide to buy a large, 1,250 m2 block and apply for a property development loan to build four townhouses on the site. They now use both their existing home and their investment property as security for the $2.5 million property development loan they need to buy their large block and build their townhouses.
This is an example of using cross collateralisation as security for the property development finance of a new development. Savvy can help you find the best mortgage for property development by comparing lenders and presenting comparison information in a simple side-by-side format.