What is a Development Loan?
A development loan is short-term financing that funds a land development project from acquisition through to sale or completion of units. Unlike a standard home loan (which funds purchase of a completed property), a development loan finances the creation of the asset itself.
Key characteristics of development loans:
- Short-term: Typically 18-36 months (compared to 25-30 year home loans)
- Stage-based funding: Money is released in tranches as project milestones are achieved (land purchase, planning approval, construction commencement, construction completion, presales)
- Interest-only during development: During the construction phase, you typically pay interest only (not principal). This keeps payments low while the project is generating no revenue
- Higher rates: Typically 2-3% above standard home loans (7.74-9.19% as of May 2026) because development carries higher risk
- Exit-based repayment: The loan is intended to be repaid when units are sold, when the project is completed and refinanced into permanent financing, or when presales/precommitments trigger exit funding
How Development Loans Work: Stage-by-Stage
Stage 1: Loan Approval (Months 1-3)
You approach a development lender with your project proposal. You provide: site details, preliminary plans, feasibility study (financial projections), evidence of site control (contract or option), and your experience as a developer. The lender assesses viability and approves the loan in principle, subject to conditions. Approval usually takes 2-4 weeks.
Stage 2: First Tranche – Land Acquisition (Month 2-3)
Once approved, the first tranche of funds is released to purchase the land. This is typically 30-40% of the total facility. The land becomes security for the loan.
Stage 3: Planning and Approvals (Months 3-6)
You engage architects, obtain council approvals, and finalise detailed designs. The lender monitors progress. No additional funds are released during this phase – you fund planning costs from your own resources or a planning facility.
Stage 4: Second Tranche – Construction Commencement (Month 6)
Once council approvals are in place, the second tranche is released. This is typically 20-30% of the facility. Funds are held in a control account and released as construction invoices are provided.
Stage 5: Construction Phase (Months 6-18)
During construction, you make progress claims to the lender. As evidence of work completion is provided (builder certificates, inspector reports), funds are released to pay contractors. You pay interest monthly on the amount drawn (not on the full facility – you only pay interest on what you use).
Stage 6: Presales/Completion (Months 18-24)
Units are completed and marketed for sale. Early presales trigger the exit strategy – either the buyer's bank refinances the unit (taking it out of your development loan), or you hold it pending further sales.
Stage 7: Exit and Repayment (Months 24-36)
Once sufficient units are sold or presold, you exit the development loan. Sale proceeds repay the loan, or you refinance the remaining units into permanent financing and exit.
Development Loans vs Home Loans vs Construction Loans
| Feature | Development Loan | Construction Loan | Home Loan |
|---|---|---|---|
| Purpose | Land + construction + sale/exit | Building construction only | Purchase completed property |
| Term | 18-36 months | 12-24 months | 25-30 years |
| Interest rate | 7.74-9.19% | 6.74-8.19% | 5.74-6.19% |
| Repayment type | Interest-only during construction, lump sum at exit | Interest-only during build, then refinance | Principal + interest throughout |
| Security | Land/project assets + personal guarantee | Land/building + personal guarantee | Completed property |
| Lenders | Specialist development lenders | Banks, specialist builders | All banks and lenders |
| Approval time | 2-4 weeks (complex) | 1-2 weeks | 5-7 days |
Key difference: A development loan finances the entire value creation process (land + construction + positioning for sale). A construction loan finances only the building phase. A home loan finances only the purchase of an already-built property. Development loans carry the most risk, which is why they have the highest rates.
Typical Development Timeline
Most development projects follow this rough timeline:
Month 1-3: Site Acquisition – Negotiate land purchase, enter contract, secure funding for acquisition. First tranche of development loan released.
Month 3-6: Design and Approvals – Architect designs project, council DA/applications lodged and approved. Lender monitors approvals process.
Month 6: Construction Commencement – Contractor engaged, construction commences. Second tranche of development loan released to fund construction.
Month 6-18: Construction Phase – Building construction progresses. Progress claims made to lender monthly. Funds released as work certified.
Month 18-24: Completion and Presales – Buildings are completed and marketed. Early buyers begin presales and obtain bank finance. Exit begins.
Month 24-36: Final Sales and Exit – Remaining units are sold, settlement occurs, development loan is repaid in full.
Important note: This is an idealized timeline. Many projects extend beyond 36 months due to: council approval delays (3-6 months), construction delays (weather, supply chain, unforeseen issues), market conditions (slower sales), or lender requirement changes. Most development loans include 6-12 month extensions and allow for timing adjustments.
Development Loan Rates and Costs
Interest rates: Development loans typically rate 2-3% above standard home loans:
- Standard home loans (May 2026): 5.74-6.19%
- Development loans (May 2026): 7.74-9.19%
- Premium for risk: +2.0% to +3.0%
Rate variables:
- Developer experience: Experienced developers (5+ successful projects) get rates at the lower end (7.74-8.24%). First-time or unproven developers pay premium rates (8.74-9.74%)
- Project type: Residential apartments get better rates than mixed-use or commercial. Residential apartments also have more lender options
- Location: Projects in established markets (Sydney CBD, Melbourne CBD) get better rates than regional or emerging markets
- Loan-to-value ratio: Lenders typically require 30-40% developer equity. Lower equity = higher rate
Costs beyond interest:
- Application/establishment fee: $3,000-$8,000
- Valuation/appraisal: $1,500-$3,000
- Quarterly/monthly admin fees: $500-$1,500 per month during construction
- Holdover interest (if project extends): 0.5-1% premium to the base rate
Real cost example: $3 million development loan at 8.5% for 24 months:
- Interest cost: $3,000,000 × 8.5% × (24/12) = $510,000
- Establishment fee: $5,000
- Valuation: $2,000
- Admin fees (monthly): $1,000 × 24 = $24,000
- Total development financing cost: $541,000 (18% of loan amount)
What Lenders Require for Approval
Development lenders assess multiple factors before approving a loan:
1. Developer Experience – Have you completed development projects before? How many? What was the size and outcome? Lenders typically want to see: 3+ completed residential development projects OR 1-2 projects if they are large/complex and successful. First-time developers can get approval but at premium rates and possibly lower loan-to-value ratios.
2. Feasibility Study – Professional financial projections showing the development is viable. Should include: land cost, construction cost (with contingency), marketing/sales costs, finance costs, and projected sale prices and revenue. The feasibility study must show break-even or profit.
3. Site Control – You must have the land secured (contract of sale, option, or ownership). Lenders will not lend on a project that is not yet site-controlled.
4. Planning and Approvals Status – What approvals are in place? What is still required? Lenders typically want: council DA lodged (minimum) or council approval in place (ideal). Projects without council approval are very difficult to finance.
5. Presales or Market Evidence – Is there evidence the units will sell? This could be: formal presales agreements, letters of interest from buyers, comparable project sales data showing demand, or agent statements of saleability. Strong presales evidence significantly improves approval chances and rate.
6. Developer Equity/Co-investment – How much of your own money are you putting in? Lenders typically require 30-40% developer equity. A $3 million project might need $1 million developer equity and $2 million development loan. This ensures you have 'skin in the game' and won't walk away if things go wrong.
7. Construction Contingency – Your budget must include 10-15% contingency for cost overruns. Lenders will not approve developments with tight budgets.
Which Lenders Offer Development Loans
Major banks offer development loans but are typically conservative. Commonwealth, Westpac, NAB and ANZ all have development lending teams, but they typically only lend on larger projects ($5 million+) or to experienced developers with strong track records.
Specialist development lenders focus specifically on development projects. They have more flexible criteria, faster turnaround, and more experience with smaller developers. They typically lend on projects from $1-50 million and are more receptive to first-time or unproven developers (at higher rates).
Non-bank lenders and private lenders also fund development projects, particularly for developers that mainstream banks decline.
Using a broker: A mortgage broker with development lending expertise can access multiple development lenders and present you with the best rates and terms for your specific project. Given the complexity of development lending, using a broker is highly recommended.
Development Loan Due Diligence Checklist
Before applying for a development loan, lenders will assess:
- ☐ Site ownership/control (contract, option, or ownership deed)
- ☐ Title report and survey plans
- ☐ Preliminary architectural plans
- ☐ Council zoning and permitted development review
- ☐ Development Application or Development Approval documentation
- ☐ Feasibility study (detailed financial model)
- ☐ Budget with 10-15% contingency
- ☐ Construction cost estimates (from builder or quantity surveyor)
- ☐ Comparable sales data (for unit pricing assumptions)
- ☐ Developer track record and references (if experienced developer)
- ☐ Personal financial statements (developer equity proof)
- ☐ Construction timeline
- ☐ Marketing/sales strategy
- ☐ Environmental/contamination reports (if needed for site type)
- ☐ Building certifier appointment and engagement
Having all this documentation ready before you approach a lender significantly speeds up the approval process.
Get Development Finance for Your Project
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