Development loans are generally available to assist small scale residential property developers to fund residential developments such as duplexes or townhouses to be constructed on a single land title.
Usually, development loans are only available to investors planning to retain the units to be constructed as long-term, income producing, assets.
In most instances, these loans are approved for the purpose of building one or two units. Some lenders may provide development loans for the construction of three or four units on the same title.
See Construction Loans if you require finance to build an owner-occupied home on your own land and your building contract requires progress payments to your builder.
See Commercial Loans if you are seeking a loan for a construction project where some, or all properties to be constructed, are to be sold as part of a profit generating venture.
Development Loans – How they Differ from Construction Loans
Development loans differ from construction loans in that they are offered to property investors as residential loans, rather than commercial loans.
This makes the loan application process somewhat easier, and the loan will not attract the higher interest rates, that apply to commercial construction loans.
Development loans also attract less fees than any commercial loan obtained for construction purposes.
Whilst the application process is less arduous, finding the right loan can be a complex challenge.
An experienced Melbourne mortgage broker is your friend when it comes to sourcing residential development loans.
Development Loans – How They Work
Residential property development loans are structured loans. You do not receive the total funds upfront as you would with a standard residential mortgage.
Your lending institution will release a portion of the funds at the completion of each stage of the building work, beginning with the deposit required by the builder.
The balance of loan funds are usually released as each of the following stages are completed:
a) Footings/Foundations
b) Framing
c) Lock-up
d) Fit Out
e) Handover
Your lending institution may require inspections at the completion of some or all stages of the building process, before providing funds for you to pay your builder.
Lender Requirements
Most lending institutions regard small scale residential development as being less risky than commercial residential development. Consequently, they apply less rigorous lending criteria to development loans.
Lenders vary in the maximum they will allow you to borrow. Generally, for a two-unit development, you can expect to borrow up to 80% of the value of the completed project. Larger developments of 3 to 4 units, may see this maximum reduced to 70%.
A mortgage broker can help you to shop around to test the limits of various lenders offering development loans in Melbourne.
All lenders will require you to pay a higher interest rate than the standard residential loan rate. Usually this rate is 1-2% higher than ordinary residential investment property loans.
Some lenders may require you to show evidence that you hold contingency funds of up to 20% of the total borrowings required. This is to ensure that you can complete the project in the event of any cost blow outs during construction.
Lenders of development loans may also only provide funding for actual building works. In essence this means that you will also need to have funds available from your own resources to cover costs such as;
a) Architects Fees
b) Engineer Fees
c) Legal Fees
d) Demolition Fees
e) Development Approval Application Fees
f) Holding Costs
Application Process
The process of applying for development loans is a more complex process than applying for a residential mortgage loan. It also takes more time than you might expect. An experienced mortgage broker, who has completed many applications for development loans, can be invaluable in helping you to achieve success without experiencing a lot of stress and time delays.
Any lender will comprehensively examine your financial standing and past loan history. They will also review all aspects of your planning and budgeting in assessing if your project will be financially viable.
To assist your lender in this process, you will need to provide a business plan for your development. This plan will need to include:
a) Your business structure (sole trader, trust, partnership, or company)
b) Full details of the property on which the project will be constructed including zoning details
c) Development plans and development approvals if already obtained
d) Estimate of total project costs
e) Amount you will personally contribute towards the total project costs
f) Construction timeline
g) Your past development experience (positive and negative)
h) Availability of contingency funds to ensure project completion
i) Details of how you will repay the loan at the end of the loan period
j) Appointed builder’s details/qualifications and past record in building similar developments
You will also need to provide the bank with the following so that they can assess your financial situation as part of their risk assessment for development loans.
a) Your personal balance sheet (Assets & Liabilities)
b) Details of the security you will provide to support your loan
c) Your credit history
d) Evidence of your employment/business income
Conclusion
Development loans are a great means of financing a small residential property development for investors and are preferable to obtaining more expensive and harder to obtain construction loans. If you are not an experienced developer well versed in the intricacies of development loans, do yourself a favour, contact us (Oz Lend), and we will help you to source your development loan.
