Property Development Loans: How do they work? | RateCity

Unlike a regular home loan that is released as a lump sum, a property development loan is released in stages, depending on the construction progress. 

The five major stages of construction generally considered for a property development loan are:

• The deposit
• Base stage
• Frame stage
• Lock-up stage
• Fixing stage

The funds are released at the end of each stage for you to pay the builder and others involved in the construction process. This helps the lender maintain accountability that the money is being used correctly and the development plan is on course.

A property development loan is generally an interest-only facility advanced for a short term of up to three years. As the money is released in stages, the interest is only charged on the amount that is drawn down and not the entire loan amount. Some lenders also let you capitalise the interest into your loan during the development period. However, your total borrowing cannot exceed the permissible loan-to-value ratio at any time. 

There’s usually no set interest rate for property development finance. Each application is assessed on a case-by-case basis. Your interest rate is generally influenced by the strength of your development plan and your track record as a developer. If you’re new to the world of property development, it could help to connect with a commercial broker to understand your options and have an expert negotiate a competitive deal for you.

The maximum amount you may borrow for property development depends on the size of your project and the lender you choose. Smaller residential developments with less than four units are generally considered low-risk by lenders. For such projects, you may be able to borrow up to 80 per cent of the hard costs.

Hard costs cover the cost of the labour and the construction material used in property development. The other expenses, such as DA approval (some states require you to submit a development application for approval), legal fees, land clearing and design fees, are unlikely to be covered by a property development loan.

If you’re borrowing money for commercial property development, the maximum amount you can borrow is generally capped at 60 per cent of the hard costs by most lenders. You may also be asked to provide additional security in the form of a mortgage registered over the property being developed.

When you apply for any kind of loan, lenders want to verify your income and liabilities to check whether you’ll be able to repay the loan. For this purpose, you’re generally required to provide two payslips, last three months of bank statements, and your last two group certificates as proof of income to the lender. 

It’s also helpful to check your credit file before applying for a property development loan. Having a clear credit file proves your creditworthiness to the lender and increases your chances of approval. 

In addition to your financial position, lenders also assess the feasibility of your development plan before approving an application for a property development loan. To satisfy this requirement, you’ll need to provide a detailed business plan. This should include information such as:

• The total estimated cost of the project and the amount you are putting towards it.
• Timeline for completion of the project.
• Your plan on project completion. For instance, how do you plan to sell the units?
• Your past development experience on similar projects.
• The credentials of the builder you’re going to hire.
• DA and council approvals.
• Details about the design concept.

Overall, the application process and eligibility criteria for a residential property development loan are more straightforward than a commercial property development loan. Still, it’s essential to consider why you want to develop a block of land before you go ahead and apply for a property development loan, whether residential or commercial. 

Having an end goal in mind will help you plan the project better and formulate a concrete development plan to present to the lenders. Speaking with a mortgage broker could help by giving you a better idea of what needs to go in your development plan from a lender’s perspective.