How does Development Finance work?
What is Development Finance?
Development finance is funding for the purpose of building new residential and commercial development projects. Examples include housing estate subdivisions, apartment builds, repurposing office blocks, and large-scale property refurbishment. Funding can be for residential, commercial and mixed-use properties. Development finance is not used for smaller-scale developments of fewer than four residential dwellings but for larger-scale commercial and industrial development projects.
Usually, the interest on a development loan is capitalised within the development period, with the entire loan, inclusive of interest charged, being repaid upon the sale of the property. The interest can be rolled up into the loan, so there are no monthly payments.
Interest rates vary depending on project risk, and most lenders require a substantial deposit of 35 per cent of the total project (plus costs) and a history of proven projects.
What do I need to consider for my first development project?
Those looking to finance their first development have a few things they need to consider. These include:
- Completing a feasibility report on the project.
- Understanding the different types of expenses involved with this project (such as council fees).
- Sourcing reputable suppliers such as builders, project managers and surveyors.
Financing your business
Invest time into your business finances. Our business finance guide unpacks everything you need to know about financing your business.
Frequently Asked Questions
A feasibility report needs to be completed before your development project. This report analyses the viability of a project to determine whether the project or venture is likely to succeed. The study is also designed to identify potential issues and problems that could arise while pursuing the project.
There are two main methods a lender will look at when it comes to financing your development. The two options are:
- 65 per cent on land and building contract value
- 60 per cent of the completed valuation
All lenders are different, but they will generally take the lower of the two options. Major Banks will want to see a 25% net profit margin on the completion of the project (20 per cent – 25 per cent for experienced developers).
Pre-sales is where you have buyers for your development before the project has started. Although not all lenders will have this as a prerequisite, it does give them more confidence when it comes to lending you money.