How to Finance a Multi-Unit Development Site Purchase

Understanding Multi-Unit Development Site Finance

Purchasing a multi-unit development site represents a significant investment opportunity for property developers and investors across NSW. Unlike standard home loans, construction finance for multi-unit developments requires specialised lending solutions that accommodate the unique challenges of development projects. Grove Financial helps clients access Construction Loan options from banks and lenders across Australia, tailored specifically for development scenarios.

When you're looking to purchase suitable land for a multi-unit development, understanding the financing structure is essential. Construction funding differs substantially from traditional mortgages because lenders only charge interest on the amount drawn down, rather than the full loan amount from day one. This structure can provide significant savings during the development phase.

The Development Finance Structure

Multi-unit development finance typically involves two distinct components: land acquisition and construction funding. The land purchase is usually settled upfront, whilst the construction component is released progressively throughout the building phase.

Here's how the finance structure typically works:

1. Land Purchase Component - Initial funds to acquire the development site
2. Construction Component - Released according to a progress payment schedule
3. Progressive Drawing Fee - Charged each time funds are drawn down
4. Interest Charges - Applied only to amounts already drawn

The construction draw schedule aligns with specific building milestones, ensuring funds are available when needed whilst minimising interest costs. Most lenders require you to commence building within a set period from the Disclosure Date, typically 12 months, to ensure projects proceed as planned.

Development Application and Council Approval

Before lenders will approve construction finance, they require evidence of council approval and a valid development application. This documentation proves the project is legally permitted and meets all planning requirements. Your registered builder must also provide detailed council plans and specifications.

Lenders assess several factors when evaluating multi-unit development applications:

• Location and land valuation
• Development feasibility and projected end values
• Your experience with similar projects
• Quality construction standards and builder credentials
• Fixed price building contract details
• Projected construction timeline

Progressive Payment Schedule Explained

The progressive payment schedule, also known as the progressive drawdown, releases funds at predetermined construction stages. Typical milestones include:

1. Base stage (slab completion)
2. Frame stage (structural frame erected)
3. Lock-up stage (roof, windows, doors installed)
4. Fixing stage (internal fit-out commenced)
5. Practical completion (final inspection passed)

Each progress payment requires a progress inspection by the lender's valuer to confirm work completion before funds are released. This protects both you and the lender by ensuring money is only paid for completed work. The inspection fee, or Progressive Drawing Fee, typically ranges from $200 to $400 per drawdown.

Fixed Price Contracts vs Cost Plus Contracts

Most lenders prefer fixed price contracts for multi-unit developments because they provide certainty around the total construction cost. A fixed price building contract specifies the complete project cost upfront, protecting you from unexpected price increases during construction.

Cost plus contracts, where you pay actual costs plus a builder's margin, are less common for multi-unit developments. These arrangements require more detailed financial management and may attract higher scrutiny from lenders.

Interest Rate Considerations

Construction loan interest rates for multi-unit developments typically sit higher than standard home loan rates due to the increased risk profile. However, during the construction phase, you benefit from interest-only repayment options, meaning you only pay interest on funds already drawn down.

Once construction completes, many borrowers transition to a construction to permanent loan, converting the construction facility into a standard investment or commercial loan structure. This eliminates the need for refinancing and associated costs.

Managing Sub-Contractors and Progress Payments

Your registered builder coordinates all progress payments to sub-contractors, including plumbers, electricians, and other trades. The builder submits progress claims to the lender, who then releases funds according to the approved construction draw schedule.

If you're considering owner builder finance, be aware that lenders apply stricter criteria. You'll need to demonstrate relevant construction experience and manage all sub-contractor payments yourself.

Additional Considerations for Development Sites

When applying for construction finance to purchase a multi-unit development site, consider these important factors:

• Loan Amount - Typically 60-70% of land value plus construction costs for development projects
• Pre-Sales - Some lenders require a percentage of units sold off the plan before approving finance
• Exit Strategy - Clear plan for loan repayment through unit sales or refinancing
• Buffer Funds - Maintain contingency for unexpected costs
• Timeline Management - Realistic construction schedule accounting for weather and material delays

Working with a Specialist Finance Broker

Construction finance for multi-unit developments involves complex lending criteria and multiple funding options. As a Renovation Finance & Mortgage Broker with extensive experience in construction loans, Grove Financial helps clients compare products across numerous lenders to find suitable construction funding solutions.

We assist with the complete construction loan application process, from initial feasibility through to settlement and progressive drawdowns. Our understanding of lender policies for development projects helps streamline approvals and ensures you secure appropriate terms.

Whether you're an experienced developer or undertaking your first multi-unit project, professional guidance through the construction finance process can save substantial time and money. We help you understand complex documentation, coordinate with builders and solicitors, and manage the ongoing drawdown process.

Your custom design and vision for quality construction deserves appropriate funding support. From land and construction packages through to spec home finance and custom home finance, Grove Financial provides access to diverse lending options tailored for NSW development projects.

Ready to explore your construction finance options for a multi-unit development site? Call one of our team or book an appointment at a time that works for you. We'll help you understand your borrowing capacity and identify suitable lenders for your project. You can also explore our other services including investment loans and commercial loans that may complement your development strategy.