Construction and development finance: how lenders fund a build from land to completion

Construction and development finance pays for a project that doesn’t exist yet. That’s what makes it different from almost every other property loan: the lender is backing a budget, a builder and a plan, and the security grows as the building goes up. Done well, it lets a developer or builder turn a block of land into finished stock using far less of their own cash. Done badly, it’s where small developers lose the most money.

How does construction finance work in practice?

The facility usually has two parts. The first funds or refinances the land. The second is a construction limit that’s drawn down in stages as the work is completed. A typical sequence:

1. Land settles, funded by the developer’s equity plus the land portion of the loan.
2. Approvals and contracts are in place: development approval, building approval, a fixed-price building contract and insurances.
3. An independent quantity surveyor reviews the budget and confirms the cost to complete.
4. The builder claims each stage, such as slab, frame, lock-up, fixing and practical completion. The surveyor inspects, the lender releases the draw, and the builder is paid.
5. On completion, the loan is repaid from sales settlements or refinanced, often into a residual stock loan if some units are still unsold.

Interest is commonly capitalised during the build, so the project isn’t servicing repayments before it has any income. The lender builds that interest into the facility limit from day one.

What do lenders look at?

Development lenders read a feasibility the way a builder reads plans. The questions that matter most:

• Cost to complete. Is the budget realistic, including a contingency, and does the remaining loan limit always cover the remaining work?
• End value. What will the finished product be worth, based on comparable sales, and how much is being borrowed against that figure?
• Developer equity. How much of your own money, or equity in other property, is in the deal? Lenders want you to have real skin in the game.
• Presales or exit. Signed contracts with deposits paid, or a credible plan to hold and refinance.
• Experience. Your track record, and the builder’s. First-time developers can still be funded, but a strong builder and a conservative budget carry more weight.
• The builder’s position. Lenders check the builder’s licence, insurance and, increasingly, financial strength, because a builder going under mid-project is a lender’s worst case.

If you’re weighing up a project and want to know whether the numbers would fly, send us the outline and someone will talk it through with you.

Where does property-secured funding fit?

Not every development need is a full construction facility. Smaller developers and builders often need property-secured funding for a specific piece of the puzzle, and our range of $20k to $5m on residential or commercial security covers many of them:

Need	How property-secured funding can help
Land deposit	Equity from another property funds the deposit while the main facility is arranged
Cost overrun	A second facility over other property tops up the budget so draws can continue
Smaller projects	A duplex or small townhouse job that sits below a bank’s appetite
Holding costs	Rates, interest and land tax while approvals are being obtained
End of project	Bridging the gap between completion and the last settlements

Holding costs deserve a word of their own. In NSW, for instance, land tax is based on land held at midnight on 31 December each year and isn’t pro rata, so a development site held across New Year can attract a full year’s tax. Approval delays add up fast.

What tax and reporting issues do developers need to plan for?

Two that regularly affect cash flow:

GST at settlement. When you sell new residential premises or potential residential land, most buyers must withhold part of the price and pay it straight to the ATO at settlement. The ATO’s guide for purchasers explains that for a fully taxable sale the withholding is one-eleventh of the contract price. The developer receives less cash at settlement than the headline price, which matters when you’re working out whether sales proceeds will clear the construction loan.

Contractor reporting. Businesses that pay contractors may need to report those payments in a taxable payments annual report, which is due by 28 August each year. Lenders reviewing your business look for clean, up-to-date lodgements, so keep on top of it.

What does development finance cost?

There’s no rate card for development finance, and anyone quoting one before seeing your project is guessing. Pricing depends on the size and type of project, how much is borrowed against the end value, the presales, your experience and your credit history.

What you can expect is the structure: an establishment fee, interest that’s usually capitalised during construction, a line fee on the undrawn limit with some lenders, quantity surveyor and inspection costs, legal costs and discharge fees at the end. Ask every lender for the total cost over the expected life of the project, not just the headline charge, and model what happens if the build runs three months late.

Illustrative example: a two-lot subdivision with a hiccup

Illustrative example: a carpentry business owner buys a corner block to build two townhouses for sale. The land costs $700k and the fixed-price build $900k. A construction lender funds most of the land and the build in progress draws, with interest capitalised.

At lock-up, the surveyor flags that rising material costs have left the remaining budget $120k short. The lender pauses draws until the shortfall is covered. The owner uses a second mortgage over the family home for $150k, giving a little extra buffer, and the build continues. One townhouse sells off the plan; the other sells two months after completion. Both settlements, less the GST withheld at settlement, clear the construction loan, and the second mortgage is repaid from the profit.

Common mistakes on small developments

• No contingency. A budget with nothing set aside for surprises is a budget that will be exceeded.
• Underestimating time. Approvals, weather and trades all slip. Every month adds interest and holding costs.
• Overstating end values. Use real comparable sales, not the agent’s best-case number.
• Ignoring GST on sales. Plan for the amount withheld at settlement before relying on sales to repay debt.
• Choosing a builder on price alone. A cheap builder who fails mid-job is the most expensive choice you can make.

Builders running their own projects may also find the builder business loan page useful for the working-capital side of the business.

Planning a build and want to know what’s fundable?

Whether it’s the deposit on a site, a top-up to finish a stalled job or funding for a small project the banks won’t look at, the next step is a short enquiry. It takes around 60 seconds and doesn’t involve a credit check at the start. Your details aren’t scattered across a long list of lenders hoping one bites; a real person looks at your project, your security and your plan, then calls you to talk it through. Please give accurate figures for land value, build cost and existing debt, so the first option we bring you is one that genuinely fits.

See what your project could qualify for →