How does a property development loan work?

Definition of a Property Development Loan

Property development loans or property development finance - is a type of loan that can help you to fund the construction of more than one property on a single title.

Most banks and non-bank lenders will split property development into two parts which are residential and commercial. Both of these have very different approval processes, fees, charges, interest rates and risk assessments.

Further Information

If the question 'what is a property development loan' has crossed your mind, you can read more here.

 


 

How property development finance works

A property development loan is released in stages as the property development and construction progresses. This is different to how a standard home loan works which is released as a lump sum.

The five major stages of construction generally considered for a property development loan are:

  • The deposit.
  • Base stage.
  • Frame stage.
  • Lock-up stage.
  • Fixing stage.

The funds are released at the end of each milestone so the developer can pay the builder and the other trades/contractors involved in the construction process.

This helps the bank or the non-bank lender to:

  • Manage risk.
  • Gain assurance that the money is being used correctly.
  • Ensure the development plan is on course.

 


 

How is interest calculated on a development loan?

A property development loan is usually an interest-only facility which is advanced for a short term (up to 3 years).

As discussed above, the money is released in stages so the interest is only charged on the amount drawn out and not on the total loan amount. Some lenders may also let you capitalise the interest into your loan during the development period.

Your total borrowing must not exceed the permissible loan-to-value ratio at any given time. 

Interest Rates on Development Loans

There’s usually no set interest rate for property development finance because each application is assessed individually.

The interest rate is generally influenced by the strength of the development plan and the developer's track record on previous projects.

For newer developers who do not have yet have a portfolio, it can be useful to engage a broker to negotiate a competitive property development loan their behalf.

 


 

About Assured Managment

Assured Management (AML) is a flexible, non-bank lender with the ability and expertise to work directly with property developers to complete projects in a timely and profitable manner. 

We provide tailored construction finance solutions and property development loans for:

  • Housing estate developments
  • Unit blocks
  • Townhouse development
  • Land subdivisions development loans.
  • Commercial and industrial premises.
  • Construction loans.
  • Investment property finance.

Contact us today for advice on how we can assist with your development finance needs.