Understanding Construction Finance
Construction finance differs fundamentally from standard property mortgages. Terms are typically 12-24 months aligned with project completion. Interest is capitalised (rolled into the loan) rather than paid monthly. Funding is determined by professional valuation of both existing land and proposed completed development. Funds are released progressively as construction advances, protecting both lender and borrower.
Define Your Project Scope
Before seeking finance, clearly define your development—whether duplex, multi-unit complex, townhouse development, or land subdivision. This determines which finance products are appropriate and which lenders to approach. Consider project size, target market, and timeline carefully, as these factors significantly influence lender appetite and terms.
Prepare Your Feasibility Study
A comprehensive feasibility is essential. Lenders typically require: minimum 15-20% Return on Cost (ROC), sensitivity analysis showing viability under adverse scenarios (10% cost increase, 10% revenue decrease, or 6-month delay), land cost ideally under 40% of Total Development Cost, construction costs per square metre benchmarked appropriately ($2,000-3,500/m² depending on finishes), and 15-20% construction contingency.
Assemble Documentation
Key documents include: Development Approval (DA) or Complying Development Certificate (CDC), detailed building plans and specifications, fixed-price building contract with licensed builder, builder's licence, insurances and financial capacity evidence, developer's financial statements and track record, pre-sale contracts (if applicable), Quantity Surveyor initial cost assessment, and project timeline.
Secure Pre-Sales (If Required)
Pre-sales demonstrate market viability. Major banks typically require 70-100% of debt facility covered by qualifying pre-sales. Deposits must be 10% of purchase price held in trust. Non-bank lenders are more flexible—some require 0-50% pre-sales, others offer no pre-sale requirements at all. The trade-off is higher interest rates (7-16% vs 5-7.5% for banks).
Choose Your Lender Type
Major banks offer rates of 5-7.5% p.a. but require extensive documentation, strong pre-sales, and have longer approval times. Non-bank lenders charge 8-12% p.a. but offer faster approvals, reduced pre-sale requirements, and consider first-time developers with strong teams. Private/mezzanine lenders charge 12-16% p.a. but provide maximum flexibility for complex structures.
LVR Requirements (2025)
Major banks: 60-70% of Total Development Cost (TDC). Non-bank lenders: 65-70% of TDC or up to 70% of Gross Realisation Value (GRV). Private lenders: 60-65% TDC or 65-70% GRV. Developers typically contribute 10-30% equity, with speculative developments requiring 30-40% minimum. Some lenders assess on GRV basis without pre-sales, offering more flexibility.
The Progress Draw Schedule
Funds are released in stages aligned with construction milestones: Deposit (5-10%), Base/Slab (10-15%), Frame (15-20%), Lock-up (20-25%), Fixing (25-30%), and Completion (5-10%). A Quantity Surveyor verifies work completion before each drawdown. Interest is charged only on cumulative amounts drawn—you don't pay interest on funds not yet released.
Quantity Surveyor (QS) Role
The QS is critical to construction finance, representing the lender's interests. Pre-construction: they verify building contract pricing is market-appropriate and assess builder capacity. During construction: monthly site inspections, verification of work completed vs claimed, cost-to-complete assessments, and identification of variations. QS costs ($2,000-5,000 initial, $500-1,500 per monthly report) are typically included in soft costs.
Managing Builder Risk
Construction insolvencies reached 3,595 cases in 2024 (up 21% year-on-year). Warning signs include delayed payments to subcontractors, requests for early progress payments, and slow response times. Mitigation strategies: conduct thorough builder due diligence, request bank guarantees, include contractual provisions for financial reporting, monitor trade creditor payments, and always use fixed-price contracts where possible.
Exit Strategy Planning
Primary exit options include: sale of completed properties (most common, net proceeds repay loan), refinance to investment loans (for retained rental properties), development exit finance (short-term bridge to final sale), or residual stock loans (refinance unsold units at lower rates). Plan your exit 3-6 months before completion to ensure smooth transition.
Ready to Explore Your Options?
Our team can help you understand which financing solution is right for your situation.