A multi-unit development site purchase requires finance structured differently from standard residential lending. The property itself generates no rental income during construction, the loan amount typically exceeds standard residential limits, and lenders assess the proposal based on development feasibility rather than just your income and deposit.
Bentleigh's established residential streets near the railway line have attracted developer interest in recent years, with older single-dwelling blocks frequently rezoned or sold for townhouse and unit developments. The council approval process in Bayside and Glen Eira councils typically takes longer than in greenfield growth areas, which affects how construction finance is structured and when drawdown can commence.
What Construction Finance Covers When Purchasing a Development Site
Construction finance for a development site purchase covers the land acquisition cost and the building works through progressive drawdown. The lender provides the full land purchase amount at settlement, then releases construction funds in instalments as the building progresses, with each payment tied to a certified stage of completion such as base stage, frame stage, or lock-up stage.
Lenders only charge interest on the amount drawn down at any point in time, which means you pay interest on the full land cost from settlement, then progressively more interest as each construction payment is released. A development application approved by the local council must be in place before most lenders will offer unconditional finance approval, and the registered builder's fixed price building contract forms the basis of the drawdown schedule.
How the Progressive Drawdown Structure Works
The progressive drawdown structure releases funds according to a progress payment schedule that matches building milestones. A typical schedule includes five or six stages: site costs and slab, frame, lock-up, fixing, completion, and final payment after practical completion and council sign-off.
Consider a scenario where a developer purchases a 650-square-metre site in Bentleigh for subdivision into three townhouses under a fixed price building contract. The lender advances the land cost at settlement, then releases construction funds at each certified stage. The builder arranges for a progress inspection by the lender's valuer or building consultant, who confirms the stage is complete before the next payment is authorised. The developer pays interest only on drawn funds during construction, then typically converts to principal and interest repayments once the project is complete and the units are sold or tenanted.
Some lenders charge a Progressive Drawing Fee each time funds are released, which can range from $300 to $500 per drawdown depending on the lender and loan structure. This fee covers the cost of the progress inspection and administrative processing for each release of funds.
Land and Construction Finance Versus Separate Land Purchase
A land and construction package structures the land purchase and building works as a single loan facility from the outset. This approach suits developers who have council approval or a near-certain path to approval before settlement, and who intend to commence building within a set period from the purchase date.
Separate land purchase finance involves buying the site with standard investment loan or commercial lending, then refinancing into a construction facility once council plans are approved and a builder is engaged. This approach provides more time to finalise the development application and building design without pressure from lender conditions requiring construction to start within six or twelve months. The refinance process adds time and cost, but offers flexibility when council approval timeframes are uncertain or the design is still being finalised.
Lender Assessment Criteria for Multi-Unit Development Finance
Lenders assess multi-unit development finance based on the project's feasibility, your equity contribution, and your experience with similar projects. Most lenders require a minimum 30% deposit for development sites, though some specialist lenders will consider lower equity levels for experienced developers or projects with strong pre-sale commitments.
The development application approval carries significant weight in the assessment. A project with council approval and a fixed price building contract from a registered builder is substantially easier to finance than a speculative land purchase with no planning permit. Lenders also review the exit strategy, which typically involves selling the completed units or refinancing into an investment loan structure if you intend to hold the properties long-term.
Your previous experience with development projects influences both approval likelihood and the loan terms offered. A developer who has completed multiple projects will generally access more competitive interest rates and higher leverage than a first-time developer undertaking the same project. Some lenders require evidence of construction experience or will only lend to developers who engage a project manager with relevant credentials.
Interest-Only Repayment Options During Construction
Interest-only repayment options during the construction phase reduce monthly cash flow requirements while the development generates no income. The interest cost is calculated on the drawn balance, which increases progressively as each stage is funded, and is typically capitalised or paid monthly depending on the loan structure.
Most construction finance arrangements for multi-unit developments allow capitalisation of interest during the building period, meaning the interest is added to the loan balance rather than paid in cash each month. This structure preserves cash for construction costs and holding expenses, but increases the total debt by the time the project reaches completion. Once the units are finished and either sold or tenanted, the loan converts to principal and interest repayments or is repaid in full from sale proceeds.
How Owner Builder Finance Differs from Registered Builder Finance
Owner builder finance is harder to secure and typically comes with higher interest rates and lower maximum loan amounts than finance arranged with a registered builder under a fixed price building contract. Lenders view owner builder projects as higher risk because cost overruns are more common, construction timelines are less predictable, and there is no builder's warranty or insurance in place.
If you intend to manage the construction yourself and pay sub-contractors directly, expect to provide detailed cost breakdowns for every trade, demonstrate relevant building experience or qualifications, and accept a lower loan-to-value ratio than you would receive with a registered builder. Some mainstream lenders will not offer owner builder finance at all for multi-unit developments, limiting your options to specialist lenders and non-bank providers.
The cost plus contract structure, where the builder charges for actual costs incurred plus a margin, sits between owner builder and fixed price contracts in terms of lender appetite. It offers more flexibility than a fixed price contract but introduces cost uncertainty, which most lenders prefer to avoid on development projects.
What Happens If Construction Costs Exceed the Approved Loan Amount
If construction costs exceed the approved loan amount, you must fund the shortfall from your own resources or seek a loan variation from the lender. Lenders will only consider a variation if the increased cost is supported by a legitimate variation to the building contract and a revised valuation confirms the completed project value justifies the higher debt level.
Variations to the building contract should be documented and approved before the work is carried out, with an updated progress payment schedule reflecting the additional cost. In situations where cost overruns occur due to poor project management, unapproved changes, or underestimation of site costs, lenders are unlikely to provide additional funding, and the project may stall until the developer injects more equity.
It is common practice to maintain a contingency buffer of 10% to 15% of the construction cost as cash reserves when planning a multi-unit development, specifically to cover variations, unforeseen site issues, or delays that extend the interest cost beyond initial projections.
Multi-unit development finance relies on accurate cost estimation, realistic timelines, and sufficient equity to absorb variations and holding costs during construction. Call one of our team or book an appointment at a time that works for you to discuss your development project and explore suitable construction loan options from lenders across Australia.
Frequently Asked Questions
How much deposit do I need to purchase a multi-unit development site?
Most lenders require a minimum 30% deposit for multi-unit development site purchases. Specialist lenders may consider lower equity levels for experienced developers or projects with strong pre-sale commitments, but expect higher interest rates with reduced deposits.
Can I get construction finance before council approval is granted?
Some lenders will provide conditional approval before council approval, but unconditional finance approval typically requires a development application approved by the local council. Separate land purchase finance is an option if you need to settle before the planning permit is finalised.
What is a progressive drawdown and how does it work?
A progressive drawdown releases construction funds in instalments as the building reaches certified stages such as slab, frame, lock-up, and completion. The lender only charges interest on the amount drawn down at each stage, and each payment requires a progress inspection to confirm the work is complete.
Do I pay interest during construction on a development loan?
Yes, you pay interest on the drawn balance during construction, starting with interest on the full land cost from settlement. Interest is typically charged on an interest-only basis and can be capitalised or paid monthly depending on the loan structure.
Is owner builder finance available for multi-unit developments?
Owner builder finance is available but harder to secure for multi-unit developments, with higher interest rates and lower loan amounts than registered builder finance. Many mainstream lenders will not offer owner builder finance for development projects, limiting options to specialist lenders.
