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Development Finance

How Development Loans Work

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Quick answer

Development loans usually fund

60% 75%

Of total development cost, with the rest coming from borrower equity

  • Typical loan term 12 to 24 months
  • Construction funding method Staged drawdowns
  • Loan repayment paths Sale or refinance
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A development loan is a specialised facility used to fund the purchase of a site, the cost of construction and related soft costs for a project that will later be sold, refinanced or held as investment stock.

In Australia, these loans are common for townhouse projects, low rise apartment developments, subdivisions, mixed use projects and selected commercial developments where a lender can clearly see the construction plan, exit strategy and expected end value.

Unlike a normal term loan, development debt is usually structured as a short to medium term construction facility where funds are advanced in stages, interest is commonly capitalised, and lender controls remain active throughout the build.

Where development loans are commonly used

Development lending is designed for projects where value is created through building, subdivision, repositioning or staged delivery rather than simply buying an already completed property.

Depending on the lender, the facility can fund site acquisition, approved works, professional fees, interest reserves, contingency and selected marketing costs within an agreed total development budget.

Typical projects funded include:

  • iconTownhouse developments
  • iconApartment developments
  • iconLand subdivisions
  • iconHouse and land projects
  • iconMixed-use developments
  • iconCommercial developments

How a development loan works from start to finish

A development facility usually starts with lender assessment of the site, borrower, feasibility, building contract and exit strategy.

Once approved, the loan does not normally advance in one lump sum. Instead, the lender settles the site or refinances existing debt, then progressively releases construction funds as the works are completed.

Typical funding milestones may include:

  • 01 Land settlement
  • →
  • 02 Slab stage
  • →
  • 03 Frame stage
  • →
  • 04 Lock-up stage
  • →
  • 05 Fit-out stage
  • →
  • 06 Completion

A quantity surveyor or monitoring surveyor commonly checks progress and cost to complete before each draw. That gives the lender comfort that funds are being used correctly and that the project remains on budget, on programme and capable of reaching completion.

How lenders structure the facility

Development loans are commonly structured around two core lending measurements:

Method 01

Loan to value ratio (LVR)

LVR measures debt against the current value of the site or the completed value, depending on the stage and lender policy.

Method 02

Loan to total development cost (LTDC)

LTDC measures the lender's contribution as a percentage of the full development budget, including land, build costs and approved soft costs.

Common funding range 60–75%
  • Lender funds an agreed percentage of the development budget
  • Borrower funds the balance using cash, site equity or other acceptable security

In practice, the facility size is not just about one ratio. Lenders compare debt against total cost, against value, against the expected gross realisation of the project and against the strength of the borrower. Cleaner projects with stronger presales, lower complexity and experienced teams are generally easier to fund.

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What lenders assess before the loan starts

Before a development loan is approved, the lender will stress test the commercial viability of the project.

This is where the feasibility becomes central. It tells the lender what the project should cost, what it should be worth when complete and whether there is enough profit buffer to absorb normal risk.

A lender review will usually consider:

  • iconLand purchase cost
  • iconConstruction costs
  • iconProfessional fees
  • iconMarketing and selling costs
  • iconContingency allowances
  • iconTotal development cost
  • iconProjected sale values
  • iconDeveloper profit margin
15 - 20 %
Many lenders want to see a sensible margin, often around 15 percent to 20 percent or more, because the loan has to survive build risk, time overruns, valuation changes and selling risk. The stronger the feasibility, the easier it is for the facility to work all the way through to repayment.

How pre sales fit into the loan

For larger or higher density projects, lenders may require pre sales before part or all of the construction facility is available

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What pre sales do

Pre sales provide signed contracts that help demonstrate future revenue and reduce the lender's concern about end demand.

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Why they matter to the facility

They support the exit path of the loan by showing how debt will be repaid on completion, especially in projects with many end buyers.

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When they may not be needed

Smaller developments, simple townhouse projects and strong borrower files may be funded without pre sales depending on lender appetite.

Where development loans usually become difficult

Development loans work well when the file is complete, the budget is realistic and the exit is clear. Problems usually arise when one of those pieces is weak.

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Not enough equity in the structure

Development debt rarely funds the whole project. If borrower contribution is too thin, the lender may not be comfortable that the deal can absorb normal shocks.

Possible solutions include:
  • icon Use equity from other property
  • icon Bringing in joint venture partners
  • icon Using private development lenders
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Approval or documentation gaps

If the approval pathway, plans, contract documents or supporting reports are incomplete, the facility can stall or be priced as higher risk.

Common weak points include:
  • icon Development approval still pending
  • icon Incomplete plans or consultant reports
  • icon Missing building or QS support
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A feasibility that is too thin

If the margin is too low, even a small variation in time, build cost or value can damage the lender's exit position.

This is why lenders analyse feasibility, valuation assumptions and contingency so closely before drawdown.
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Weak execution risk

First time developers, complex sites, poor builder selection or weak consultant teams can all make the loan harder to place.

Ways to improve the file may include:
  • icon Using an experienced builder and consultant team
  • icon Starting with a simpler project type
  • icon Approaching lenders aligned to the deal profile
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How the process usually unfolds

Step

01

Secure the site or option and define the project concept, zoning and intended exit

Step

02

Prepare plans, approvals, consultant reports and a lender ready information pack

Step

03

Build the feasibility including costs, contingency, timing, end values and debt strategy

Step

04

Confirm borrower contribution from cash, land equity or other acceptable security

Step

05

Submit to suitable lenders for indicative terms, valuation, QS review and credit approval

Step

06

Settle the site, draw progressively during construction, then repay by sale, refinance or residual stock hold

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Speak with a Development Finance Specialist

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Property development finance can vary significantly depending on the project size, location, approvals, and the developer's experience.

A specialist can review your project and help determine which lenders may be able to fund it.

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Related Questions

These related questions explain other parts of the development lending process

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