Property development in Australia used to mean national corporations subdividing enormous parcels of land to create new suburbs. But times have changed. Thanks to property development loans, smaller-scale and even first-time investors can now enjoy the financial benefits of property development.
How to Finance Your Property Development
Whether you’re constructing a duplex on a vacant block of land or demolishing an older property to make way for 4 new townhouses, the key to a successful outcome is securing the right property development finance. According to a poll by CrowdProperty Australia, 56% of smaller developers listed securing project finance as their biggest hurdle.
So, what is a property development loan? And how much can you borrow when you apply for property development funding?
What Are Property Development Loans?
Property development loans are a specialised finance product designed for those planning a development project. Unlike a traditional mortgage, these loans are typically short-term and tailored to fund the construction or renovation of residential, commercial or mixed-use properties.
When considering a development loan application, lenders will look at a range of factors, including the project feasibility, the borrower’s financial stability and how likely it is that the project will turn a profit. This will then be used to determine loan eligibility and terms. Development finance generally offers more flexible repayment terms and can be structured to cover construction expenses, as well as the cost of purchasing land and any associated professional fees.
Residential Vs Commercial Property Development Finance
One of the main factors determining how much you can borrow for property development funding is whether your project is classed as residential or commercial.
- Residential Development: Residential finance can be used to fund residential properties such as single-family homes, townhouses or apartment complexes intended for private occupancy. If your proposed development is for four units or less, then this will usually qualify for residential finance (which has a simpler application process).
- Commercial Development: Commercial finance can be used for projects such as office buildings, retail spaces, industrial complexes or mixed-use developments. Commercial developments usually cater to both businesses and tenants, making the application more complicated.
While residential and commercial property development finance are both similar, lenders are usually a lot more conservative when it comes to approving commercial loans. This means you’ll need to supply a lot more paperwork for a commercial application and may face stricter lending criteria.
How Much Can You Borrow with a Property Development Loan?
How much you can borrow will depend on a range of factors, including:
- Type of project
- Your current financial standing
- Specific lender criteria
- Loan-to-Value Ratio (LVR)
The LVR is the loan amount shown as a percentage of the total project cost. Generally, lenders will allow you to borrow up to 80% LVR for smaller development projects and up to 70% LVR for larger ones.
For example, if you had a small residential project that was going to cost $1.5 million in total, you could potentially borrow up to 80% of that cost, or $1.2 million. The remaining 20% you would need to fund yourself, either with cash savings or with equity from another property.
Property Development Funding: Maximise Your Borrowing Capacity
Before applying for development funding, there are 4 simple steps you can take to maximise your borrowing capacity:
- Have a comprehensive business plan ready that highlights the project’s market demand and potential worth.
- Try to improve your credit rating by reducing debt, paying bills on time and increasing income and/or assets.
- Show that you’ve minimised risk by doing thorough market research.
- Talk to experienced development finance specialists for expert advice.
Talk to Professional Lending Solutions About Property Development Loans
Finding the right property development loans is essential for successful projects. Fortunately, this isn’t something you have to navigate on your own. At Professional Lending Solutions, our brokers can guide you through the borrowing process, negotiate favourable terms for your loan and connect you with lenders offering competitive financing options tailored to your project’s needs.
To find out more about how much you could borrow, book an appointment today.
Phil’s journey from banking to mortgage brokering reflects a career driven by a commitment to personalised service and tailored financial solutions. With a distinguished background in banking, including roles at NAB, ANZ and Lloyds TSB Bank in the UK, Phil spent 12 years developing expertise in personal and commercial finance, while also completing a Bachelor of Business (Finance), followed by an MBA majoring in International Business.