Land bank loan vs construction loan: what is the difference?

You have bought or are buying a site with development potential but you are not ready to build: the DA is twelve months away, the design is not finished, or you are waiting on presales or a builder. Banks generally will not fund raw land for development at high LVR without an approved project, so land bank loans come from non-bank and private lenders at 50 to 65 per cent of land value, with interest capitalised so there are no monthly repayments. Rates are higher than bank construction rates because the security is undeveloped land and the exit depends on the project proceeding.

Once the DA is issued, the builder is contracted and any presale condition is met, the project is refinanced into a construction facility. The construction lender pays out the land bank loan as the first draw, which becomes the land component of the facility, and then funds the build progressively. The land is revalued with DA in place, which usually lifts the value and improves the overall loan to value. Timing matters: land bank loans have hard expiry dates and extending them is expensive.

Some lenders offer a combined land and construction facility from the outset, with the land settled under the same approval that will fund construction, subject to conditions being met by a set date. This avoids two sets of fees and a refinance, but it requires the project to be well advanced at the time of land settlement. Non-bank lenders are more flexible on this than banks.

The dangerous period is between land settlement and construction start. If the DA is refused or delayed, presales do not materialise, or construction costs blow out the feasibility, the land bank loan still has to be repaid at expiry. Borrowers should have a fallback exit, usually the ability to sell the site with or without approval, or to refinance to a longer-term land loan against other security.