Smart ways to approach multi-unit development finance

What Makes Development Site Finance Different from a Standard Construction Loan

Development site finance for multi-unit projects requires progressive drawdown structures tied to build milestones, not upfront release of the full loan amount. Lenders assess both the land acquisition and the construction phase separately, with funds released in instalments as each stage is verified by an independent valuer.

Consider a buyer acquiring a 1,200 square metre site in South Perth zoned for three townhouses. The land purchase settles first, funded by an initial advance under the construction loan. Once council approval is obtained and a registered builder is engaged under a fixed price building contract, the lender establishes a progress payment schedule that releases funds as footings are poured, frames are erected, lockup is reached, and practical completion is achieved. Between drawdowns, you only pay interest on the amount drawn down, not the total approved facility.

This structure reduces the lender's risk and controls how capital flows into the project. It also means you need to coordinate your builder's progress payment schedule with the lender's progressive drawing requirements. Some builders prefer cost plus contracts, but most lenders require fixed price contracts for development projects to limit cost blowouts.

How Much Deposit You'll Need for Multi-Unit Development Sites

Most lenders require a deposit between 20% and 30% of the total project cost, which includes both land acquisition and construction expenses. The deposit is calculated on the combined value, not just the land component, and must come from genuine savings or existing equity.

In a scenario where the land costs $800,000 and the build cost for three townhouses is estimated at $1,200,000, the total project cost is $2,000,000. A 25% deposit requirement means you need $500,000 upfront, either as cash savings or equity from another property. Lenders will also expect you to demonstrate capacity to service interest-only repayment options during construction, which typically runs for 12 to 18 months depending on the scale of the project.

Developers often underestimate holding costs during construction. You'll be paying interest on drawn amounts, council rates on the land, and potentially holding costs on your existing residence if you haven't sold. A clear cash flow forecast that accounts for these expenses will strengthen your construction loan application.

The Progressive Payment Schedule and How Drawdowns Work

Funds are released in stages that correspond to physical milestones on site, verified by an independent inspector before each payment is authorised. Typical stages include base stage, frame stage, lockup, fixing stage, and practical completion, though the exact structure depends on your lender and builder.

Once the builder completes the footings and slab, they submit a claim under the progress payment schedule. The lender arranges a progress inspection to confirm the work matches the claim, then releases that portion of the construction funding to the builder. You begin paying interest on that additional drawn amount immediately. The builder uses those funds to pay sub-contractors, purchase materials, and move to the next stage.

Some lenders charge a Progressive Drawing Fee for each inspection and release, typically between $300 and $600 per drawdown. Across five or six stages, these fees add up. Others bundle inspections into the loan establishment cost. Clarify this upfront when comparing construction loan options from different lenders, as fee structures vary widely.

Council Approval and Development Application Requirements

You cannot draw down construction funds until council approval is granted and all conditions are satisfied. Lenders require evidence of an approved development application before they will commit to a formal loan offer, and most loan approvals include a condition that you must commence building within a set period from the Disclosure Date, often six to twelve months.

If your development requires a rezoning application or involves complex planning overlays, expect the approval process to extend beyond three months. South Perth has established residential zones that support medium density housing, but individual sites may still trigger design review or neighbour consultation depending on setbacks, height, and parking provisions. Your broker should confirm that the land is zoned appropriately before settlement, as retrospective changes to a development application can delay drawdowns and erode your contingency buffer.

Some lenders will issue conditional approval before council plans are finalised, but the formal loan contract won't be signed until all planning conditions are met. This creates a gap where you may need to settle on the land using interim funding or negotiate an extended settlement period with the vendor.

Fixed Price Building Contracts and Why Lenders Prefer Them

A fixed price building contract locks in the total construction cost before the first drawdown, giving the lender certainty that the project won't exceed the approved loan amount. Cost plus contracts, where the builder charges for actual costs plus a margin, expose the lender to budget overruns and are rarely accepted for multi-unit developments.

Your builder provides a detailed schedule of work with a fixed total price, broken into the stages that align with the progressive drawdown schedule. If the builder encounters unexpected costs, those are absorbed under the fixed price agreement, not passed to you or the lender. This is why builders price fixed contracts conservatively and why they often include contingency margins.

Lenders will review the building contract before approving the loan. They check that the contract price is consistent with the valuation, that the builder holds appropriate licenses and insurance, and that the payment schedule aligns with industry norms. If the contract includes owner builder provisions or non-standard clauses, expect additional scrutiny or a decline.

Interest Rates and How They're Calculated During Construction

Construction loan interest rates are typically higher than standard variable home loan rates, reflecting the additional risk and administration involved in progressive drawdowns. Rates are calculated daily on the amount drawn down, not the total approved facility, so your interest cost increases as each stage is funded.

During the construction phase, most borrowers choose interest-only repayment options to minimise monthly outgoings while the project generates no income. Once construction is complete and the dwellings are either sold or tenanted, the loan can convert to principal and interest repayments or be refinanced into separate investment loans if you're holding the units long term.

Some lenders offer a construction to permanent loan structure, where the interest rate during construction is higher but converts automatically to a lower ongoing rate once the project is finished. Others treat construction and permanent finance as two separate transactions, requiring a full refinance at completion. Understand which model your lender uses, as it affects both your upfront rate and your exit strategy.

What Happens If the Build Runs Over Budget or Over Time

If construction costs exceed the approved loan amount, you'll need to inject additional equity or negotiate a loan increase, which requires a revaluation and fresh credit assessment. If the project timeline extends beyond the agreed construction period, you may face extension fees or be required to refinance the loan entirely.

In our experience, cost overruns typically arise from variations requested by the developer, unforeseen site conditions like contaminated soil or poor drainage, or delays in obtaining final council approval for non-compliant elements. A registered builder working under a fixed price contract absorbs some of these risks, but variations initiated by the client fall outside the fixed price and must be funded separately.

Time delays increase your holding costs, particularly if you're paying interest on drawn amounts while waiting for materials or weather-dependent stages to complete. Most lenders allow a construction period of 12 to 18 months. Extensions beyond that may trigger a review of your financial position, especially if your income or employment circumstances have changed since the original approval.

Moving from Construction Loan to Long Term Finance

Once practical completion is reached and the final drawdown is made, your construction loan either converts to a standard variable or fixed rate facility, or you refinance with a different lender. The conversion depends on the loan structure you chose at the outset and whether you're selling the completed units or holding them as rental properties.

If you're selling, the settlement proceeds repay the construction facility. If you're holding the properties, you'll need to demonstrate that rental income covers the interest cost, or that you have sufficient serviceability to hold all three dwellings on your balance sheet. Some developers split the completed units into separate titles and refinance each individually, which can improve loan to value ratios and access better rates.

The valuation at completion determines how much equity you've created through the build process. If the completed value exceeds the total project cost by a meaningful margin, you may be able to extract some equity for the next project or use it to reduce your ongoing loan amount.

Call one of our team or book an appointment at a time that works for you. We'll review your project scope, run the numbers, and connect you with lenders who actively support multi-unit development finance across South Perth and the wider metro area.

Frequently Asked Questions