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Property Development Loans

If you’re thinking about a loan for property development, compare lenders with Savvy to help you find the best deal for you.

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, updated on August 8th, 2023       

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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.

What are property development loans and how do they work?

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).

What’s the difference between residential property development loans and commercial property development loans?

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.

At what stages are progress payments for property development loans released?

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:

  • an initial deposit as a down-payment to the builder
  • the base or foundation stage as concrete foundations are laid
  • the framing stage as the structure or structures begin to take shape
  • the lock-up stage as the dwellings near completion
  • the second fixing stage as the internals of the building are complete

Is it a good idea to cross collateralise to finance a new property development?

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.

More questions about property development loans

What is the minimum profit margin expected by lenders on a property development project?

Most lenders would like to see the potential for at least a 20% profit margin on any property development proposal.  This should be considered the minimum profit margin for the project to be considered a viable development proposal.

Can I use my rental income to boost my borrowing power when applying for a property development loan?  

Yes – if you have clear documentation of your rental income (such as a signed rent book, or bank statements showing regular rental deposits) for at least three months prior to your loan application for property development finance.  Getting a loan for property development will be easier if you’re able to show income from more than one source, as this will not only increase your borrowing power, but will reduce your risk profile.  Lenders would consider multiple income sources less risky because if you lose one job or source of income, you still have alternative ways to finance your loan repayments.

It is compulsory to submit a property development business plan when applying for a property development loan?

It isn’t compulsory, but it’s highly recommended if you want to ensure your application for property development finance is approved.  Of course, all lenders differ in their lending criteria, so some lenders may ask for a business plan before approving an application, and others may not.  However, the overall depth and thoroughness of your application for a property development loan will have a strong influence on whether it’s successful or not.  Therefore, it’s always worth including as many high-quality planning documents as possible to ensure your application is successfully approved.

How much capital will I need for my property development?

You won’t need actual capital for a deposit for your property development loan if you can prove you have sufficient equity in other properties.  If you don’t have equity, though, you can use capital equivalent to the required deposit.  However, most lenders will ask you to have a contingency fund in case there are any unexpected delays or issues which prevent the completion of your development on time.  The amount required for the contingency fund will vary from lender to lender, but an average would be in the region of 10% of the cost of the development project (not the final property value).

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