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  • May 3, 2024

All You Need to Know About Development Loans in Melbourne

Embarking on a residential property development project in Melbourne or any other area in Australia can be daunting and exhilarating. 

Understanding the nuances of development loans is a vital element for anyone considering a small-scale residential property development project. 

Oz Lend, a long-established mortgage broker, caters to residential property developers, providing professional advice on all aspects of applying for and obtaining approval for development loans in Melbourne or elsewhere.

What Are Development Loans?

Development loans are a specialised financial product that cater specifically to the needs of residential property developers. They are designed to provide funding for the various stages of the construction of small scale residential real estate projects. These are typically projects that fall outside the scope of home loan lending. 

Larger scale residential property development finance is normally provided via commercial loans which generally come with higher interest rates that reflect the greater degree of risk taken by the lender.

Unlike traditional mortgage loans, development loans are typically short-term, focusing on project completion and subsequent asset sales for loan repayment.

Key Features of Development Loans 

These loans are the means by which builders and other property developers are able to fund their small scale residential developments. 

They are generally obtainable for projects involving the building of one to four units on a single landholding and come with a set of advantages over the alternative commercial loan options:

  • Borrower-Friendly: These loans are offered as residential rather than commercial loans, simplifying the application process and sparing you from the higher interest rates that commercial projects attract.
  • Cost-Efficient: Unlike commercial loans, development loans often have fewer fees, which could significantly impact your overall costs.
  • Loan-to-Value Ratios: Depending on the project’s scale, you might secure financing up to 80% of the value for a duplex project, though larger projects could see this cap lowered to 70%.

Development Loans Eligibility 

The eligibility criteria for acquiring real estate development loans are strict, ensuring that only well-conceived, viable projects with promising outcomes receive the necessary funding. Here is an overview of the essential eligibility criteria:

  1. Proof of Progress: A current Planning Permit, Officially Stamped Building Plans, and a Fixed Price Contract with a Registered Building Practitioner must all be provided as part of the loan application process. 
  2. Valuation Report: A valuation report issued by a licensed valuer which reflects the vacant land value, the total construction cost of the proposed project, and the estimated project end value, must also be provided.                                                                         
  3. Clear and Achievable Development Plan: The borrower must present a detailed development plan that articulates the project’s purpose, delineates clear goals, and anticipates attainable outcomes.
  4. Financial Stability and Capability: Solid financial grounding is imperative. Loan applicants must furnish evidence of sound financial health, including historical performance records and future financial projections that substantiate the capacity to meet repayment obligations.
  5. Regulatory Compliance: All projects must adhere to prevailing legal and regulatory mandates. This compliance encompasses conducting thorough environmental and social impact assessments, where necessary, to ensure that the project’s implementation is sustainable and ethically sound.
  6. Proven Management Expertise: Demonstrable experience and expertise in project management, particularly within the construction industry sectors is a fundamental requirement. This criterion attests to the developers ability to complete the project on time and within budget.
  7. Collateral or Guarantees: To secure the loan, applicants must provide collateral or guarantees that satisfy the lender’s stipulations and mitigate the financial risk.
  8. Economic and Social Contribution: The proposed development project should contribute to economic empowerment, job creation, and community upliftment. This is usually evidenced by Town Planning Approval of the proposed development application submitted by the developer to the relevant Local Government Authority.

Meeting these pivotal criteria is vital for prospective borrowers and is the foundation of a mutually beneficial partnership between the lender, the borrower, and the local community. Compliance with these criteria assures lenders of the project’s feasibility and envisages a positive and socially responsible outcome for all parties involved.

The Development Loan Process

The Development Loan Process involves several key stages to ensure a successful application. 

It starts with pre-qualification, where your financial information is assessed by your lending institution to determine your eligibility. 

Following this, you must submit various documents associated with the proof of progress and project valuation loan criteria (as outlined above) as well as any documents needed to establish your financial position and your ability to meet loan repayments.

The assessment stage is next, as the lending institution carefully evaluates your proposed project and your exit strategy to assess the risks involved.

During the application process, it’s essential to highlight the strengths of your project plan while being prepared to address any potential challenges that may arise, such as unexpected delays or cost overruns. 

Displaying a comprehensive grasp of your project and its potential challenges can enhance the likelihood of obtaining a development loan.

If the project end value as assessed by the licensed valuer is below the land value plus construction cost, the lender will consider the project to be over-capitalised. This will generally result in a reduction in the amount they are willing to lend to finance the project.

In this situation, the lender may still be willing to finance the project, but will require a larger amount of developer project contribution.  

Once your loan is approved, and before any funds are released, you will be required to provide a copy of the Building Permit issued by the relevant authority and evidence of the currency of the Builder’s Building Insurance policy.

Alternatives to Development Loans

Exploring alternatives to traditional development loans can broaden your financial options, especially if traditional lenders are less than enthusiastic with your loan application. 

Engaging with private equity investors, or solicitors and accountants representing high net-worth individuals, opens up alternative possibilities for funding your development project. 

These alternative funders to the traditional financial institutions, offer unique advantages and disadvantages that must be thoughtfully considered in alignment with your specific requirements, and the intricacies of your development project. 

By thoroughly assessing these alternative offerings, you can make informed decisions that may see one of these alternative options align closer to your project objectives.

Oz Lend – Your Trusted Partner in Development Loans

With Oz Lend’s experience and comprehensive approach, obtaining a development loan for your small scale residential real estate project becomes a streamlined and less stressful task. 

Our advisers are adept at navigating the complexities of loan structures, ensuring that you receive the best possible advice and financial solutions for your development loans.

  • Tailored Solutions: Our services are flexible and personalised to cater to your needs, ensuring a bespoke approach that aligns perfectly with your goals.
  • Specialisation in Complex Loan Structures: With a deep understanding of complex loan structures, we are well-equipped to provide expert advice and support and guide you through the intricacies of the lending process with ease.
  • Efficient Digital and Remote Support: We embrace technology and offer seamless digital and remote support to enhance convenience and accessibility for our valued clients, regardless of location.
  • Proven Track Record in Assisting Property Developers: Our strong track record speaks for itself, demonstrating our commitment to assisting property developers in achieving their ambitions through tailored financial solutions and expert guidance.

Choose Oz Lend as your advisor in preparing and submitting your development loans application and make the process as timely and stress free as possible.

For more information, Click on the Request Your Free Consultation Button at the top of this webpage or call us on 1300 438 669.

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