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Loans For Residential Development

How a residential development loan works

Residential development loans typically have five stages of development, namely:

  • Deposit stage
  • Base stage
  • Frame stage
  • Lock-up stage
  • And Fixing stage

With that, banks and lenders will follow a progress payment system similar to those in a residential construction loan.

You have to provide documents such as the builder’s receipt to prove that you already handed in the funds needed for the deposit stage.

For every progress billing, you’ll have to sign a progress payment and attach a builder’s invoice along with it before sending it to your residential development lender.

You may also encounter payment delays due to human error, like losing your documents, especially if different people are in charge of multiple copies. In that case, a mortgage broker can help you out since they can organise and manage all the paperwork for you.

How much amount can I loan?

Depending on your development scale, you can avail of the following residential development loan amounts:

Small residential developments

  • For two units/dwellings: Get up to 95% of development hard costs (land and construction)
  • For four units/dwellings: Loan up to 80% of development hard costs
  • You can also borrow up to 100% property value with a loan guarantor

Medium residential developments (more than five dwellings)

  • Get up to 70% of development hard costs (land and construction)
  • Loan over 70% property cost at the expense of higher interest rates
  • You must achieve 70% gross realisation value (GRV)
  • Get approved for up to 3 years loan term
  • Minimum lending amount of $1,000,000
  • Apply for a higher loan-to-value ratio (LVR) for higher interest rates

How does residential differ from commercial loans?

Generally, you’ll need a residential development loan for properties with a maximum of four dwellings per title. That includes a townhouse, small unit block, triplex, or duplex property.

More than four dwellings in one title will fall under the commercial lending arm and commercial development loans. But under a residential arm, you can enjoy significantly lower interest rates.

How will lenders evaluate my loan application?

Banks and non-bank lenders want you to ensure that your residential development plan can be profitable and successful in the long term.

Aside from that, they will also ask you to provide your financial statements and a feasibility study for the development plan. From there, lenders will look into the costs of development and compare them to your expected revenue.

Make sure to do your due diligence in your business plan and always have a professional team look into it. A business plan should contain the following points:

  • Fund sources you’ll need for development completion
  • Contingency and emergency funds of about 15% of the project value
  • Lengthy experience in the development and construction industry
  • Having an experienced and certified building team
  • Preparing a residential design concept, site description, and zoning
  • Soft and hard costs, including construction and land acquisition
  • A comprehensive construction and development timeline
  • Your marketing strategy to win over tenants or sell the units

Keeping the above pointers in mind should help you strengthen your loan application and improve your chances of getting approval.

What if this is your first development project?

Most banks and non-bank lenders will require previous development experience as project managers, builders, or property developers.

But if you’re venturing into the industry for the first time, our specialist mortgage brokers will find ways to help.

  • Loan up to 70% GRV or 80% of hard cost value
  • Get approved for residential development loans of up to $1,500,000 for four dwellings
  • Some banks don’t require presales for small properties and unit developments as well as proof of income for application

Contact us at 1300 052 055 to discover whether you qualify for a residential development loan today!

How will lenders assess my financial position?

Banks and non-bank lenders want to know your financial position to determine your financial strength.

Typically, they’ll want to know if you’re currently in a strong financial position with reliable loan security as well as reliable experience in the industry.

Banks may ask you to attach your two most recent payslips, bank statements three months prior, and team certificates two years prior.

That way, your lender can accurately assess your overall income strength and whether you can meet the loan repayments.

Lenders may also require you to provide proof of good credit with major banks. However, our specialist mortgage brokers can help you find banks that will consider bad credit applicants in a reliable financial position.

Having strong loan security in place can also help maximise your borrowing power. Speak with us today, and we’ll let you know how we can help!

Maximise your buying power with a feasibility study

Lenders will always look into your due diligence and ask for a close approximation of the construction costs versus your potential revenue or profit margin for the project.

Keep the following costs in mind:

  • Development Application Costs (DA): Every local council has different DA fees, so check your local council for more information.
  • Construction/Hard Costs: These include labour costs, overruns, and material costs, among others.
  • Legal processing fees: Before you can sell the property, you’ll need to pay for stamp duty and other professional fees that can amount to up to 6.5% of the hard costs.
  • Contingency costs: Unexpected delays and expenses can arise during the development, so you have to make sure you considered a buffer in your feasibility study to account for contingencies.

Make sure to coordinate with your team to account for all relevant factors so you can accurately predict what fees you’re up against throughout the development.

Besides, you have to make sure that you’ll walk away with 20%-30% profit from presales and post-sales after finishing the project.

If your lender sees these in your application, you’ll have more chances of getting your residential development loan approved.

Is having presales a requirement?

Banks typically won’t require residential development loan applicants to have presales to qualify for the loan.

However, it largely depends on your circumstances. Properties located in rural areas have higher risks of failure, so lenders may exercise caution and ask for presales to ensure stability and profit.

Regardless of your location, having a presale will strengthen your application.

How about larger developments?

In the case of large-scale residential developments or even commercial developments, many banks and lenders will ask for a 100% presale before considering your application.

If your GRV is at least $5,000,000, some banks will accept a 50% presale for a slightly higher interest rate for about 15 years of the loan term.

Banks will also consider your debt service coverage ratio (DSCR) for larger developments to ensure that the presales will be enough to cover the existing debt.

Do residential development loans cover soft costs?

At this point, you should already understand that residential development loans mostly cover hard costs. But what about soft costs, and what expenses fall under this category?

Generally, soft costs include processing fees and legal fees, including:

  • Development application fees
  • Land clearing cost
  • Landscaping and driveway development cost
  • Professional fees for architects and engineers
  • And other legal fees

Don’t forget to keep these expenses in mind when computing the development costs to prevent unexpected fees in the long run.

Besides, you can provide an official written price quote for your soft costs, and our mortgage brokers will negotiate with the lender to increase the loan amount for soft costs.

But keep in mind that this will follow a case-by-case basis and largely depend on your overall application strength and business strategy.

Feel free to contact us at 1300 052 055, and we’ll let you know how we can help and whether you qualify for a residential development loan.

Can I refinance into a standard residential loan?

We recommend reaching out to your mortgage broker when considering changing to a home loan.

After the development completion, you should get an Occupation Certificate for the property. Then, you have the option to refinance into a standard home loan and pay off lower home loan rates.

However, refinancing policies differ between banks and non-bank lenders. Some would require you to pay your development loan for a maximum of 1 year before you can qualify for a refinance. Otherwise, you’d pay an expensive break cost.

Refinancing into a standard home loan is only ideal for developers who already sold half of their units and meet 100% of the DSCR requirement.

By changing into a residential loan, you can save up thousands in interest payments and even sell your properties at a higher price point. But to ensure a smooth process and avoid expensive fees, seek help from a professional financial adviser before deciding your next move.

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