Simple hacks to fund a redevelopment site purchase

What is development finance for purchasing a redevelopment site?

Development finance for purchasing a redevelopment site is a loan product designed to fund the acquisition of land or property you intend to knock down, rebuild, subdivide, or substantially alter. Unlike a standard home loan where you buy a property to live in or rent out as-is, this type of finance recognises you're purchasing with the intention to change what's there.

Most lenders treat this differently to a typical property purchase because the end value and risk profile change once you start work. The loan structure needs to account for both the land acquisition and the development project that follows, even if those happen in separate stages.

In our experience, buyers often assume they can use a standard home loan to purchase a site they plan to develop, then switch to construction or development finance later. That approach can create problems when the lender discovers your true intentions during settlement or when you apply to start building. Lenders want to know your plans upfront because it affects how they assess the loan.

Consider a buyer who finds a older dwelling in Mount Waverley on a large block, ideal for subdivision into two townhouses. They apply for a standard investment loan without mentioning the subdivision plans. Six months later, when they try to start the project, the lender refuses to provide further funding and requires the loan to be refinanced to a development product. They're now facing higher interest rates, additional application costs, and project delays that eat into their budget.

How much deposit do you need for a redevelopment site?

You'll typically need a deposit of 30% to 40% of the purchase price when buying a redevelopment site. Most lenders will only lend up to 60% to 70% of the land value, which is more conservative than the 80% to 95% you might access for a standard home purchase.

This higher deposit requirement exists because lenders view the transaction as higher risk. You're not generating rental income from a completed property, and the land value alone doesn't include any built improvements. The lender also knows that once you start demolition or construction, their security temporarily decreases in value.

For a property purchased at $850,000 with plans to subdivide, you'd need between $255,000 and $340,000 as a genuine deposit, plus settlement costs including stamp duty, legal fees, and any council or planning costs. That's substantially more than the 5% to 20% deposit most first home buyers work toward for a standard purchase.

If you're working as a single-income buyer, accumulating this level of deposit can take years. Some buyers use equity from an existing property instead, but that still requires you to own something already. Others bring in joint venture partners who contribute capital in exchange for a share of the completed project, though that introduces complexity around legal structures and profit sharing.

What interest rate applies to land acquisition finance?

Interest rates on land acquisition finance typically sit between 0.5% and 1.5% higher than standard variable home loan rates. Where a residential owner-occupier might access rates around 6% to 6.5% at current variable rates, land acquisition for development purposes might be priced at 7% to 8%.

The rate you're offered depends on your loan to value ratio, the strength of your project feasibility, your deposit size, and whether you have development experience. A buyer with 40% equity purchasing a straightforward subdivision site will get better pricing than someone with 30% equity tackling a more complex multi-unit project.

Some lenders offer fixed interest rate options for the land acquisition phase, but these are less common and often come with restrictions on when you can draw down construction funds. Most developers use a variable interest rate during acquisition and then lock in rates once construction starts, depending on their project timeline and risk tolerance.

Does council approval affect your loan approval?

Council approval can be obtained either before or after you purchase the site, and your choice affects how lenders assess your application. Buying with development approval already in place makes the project less risky in the lender's eyes, but it also means you'll pay more for the property because the vendor has already done that work.

If you're buying without development approval, most lenders will want to see strong evidence that approval is achievable. That might include a town planning report, preliminary discussions with council, or examples of similar projects approved nearby. Some lenders won't commit to funding the full project until they see the actual DA approval, which means you might only get land acquisition finance initially.

Consider a scenario like this: a buyer purchases a site in Oakleigh for subdivision, settling with land acquisition finance at 65% LVR. They spend four months working with a town planner and submit their development application. Once council approval comes through, they return to the lender to access construction loans for the build phase. The lender reassesses the project based on the approved plans, and if the feasibility stacks up, they increase the loan amount to fund construction.

The gap between purchasing and obtaining approval is when you're carrying land holding costs without any income. Interest on your acquisition loan, council rates, and insurance all add up during this period. Buyers often underestimate how long this phase takes. In Melbourne's outer suburbs, straightforward subdivisions might take three to five months for approval, while more complex developments in established areas can take eight to twelve months or longer.

What documents do lenders require for development finance?

Lenders require detailed project documentation that goes well beyond what's needed for a standard home loan. You'll need to provide a full feasibility study showing project costs, expected end values, and profit margins. That includes purchase price, demolition costs, construction costs, professional fees, council fees, interest costs, and selling costs, all matched against realistic sale prices for the finished properties.

You'll also need to show your business financials if you're operating as a developer, even on your first project. That might include tax returns, business bank statements, and evidence of how you'll fund cost overruns if the project runs over budget. Lenders want to see that you have a buffer, typically 10% to 15% of project costs, available beyond what you're borrowing.

For the property itself, lenders will want a contract of sale, a valuation that addresses the 'as-is' land value and often an 'as-if-complete' valuation, any existing development approval documents, and quotes or estimates from builders if you've already engaged them. The stronger your documentation, the better your loan terms will be. Incomplete or vague feasibility studies often result in declined applications or heavily discounted loan offers.

If you're a first home buyer considering a knock-down rebuild on a single dwelling rather than a commercial subdivision, some of these requirements relax slightly, particularly if you're planning to live in the completed property. But you'll still need to demonstrate the project is viable and that you can manage the process through to completion.

How does your exit strategy affect your loan structure?

Your exit strategy determines how you'll repay the development loan and should be locked in before you purchase the site. The most common exit is selling the completed properties and using the sale proceeds to repay the loan. The second option is refinancing the completed properties onto standard investment loans and holding them for rental income.

Lenders assess these two strategies very differently. If you're planning to sell, they focus on whether the sale price will cover all costs including the loan balance. If you're planning to hold, they assess whether the rental income will service the debt once you refinance, and whether you have enough income to qualify for multiple investment loans at once.

Many buyers assume they'll decide on their exit strategy later, but lenders won't fund a project without knowing your plan. A development exit strategy affects their risk assessment and the loan structure they offer. If you're planning to sell, the lender might allow interest to capitalise during construction rather than requiring monthly repayments. If you're planning to hold, they'll assess your borrowing capacity as if those loans already exist.

For a single-income buyer, holding completed properties as investments can be difficult because your income needs to service the original development loan and the new investment loans simultaneously during the transition period. Selling is often the more practical option, which is why many first-time developers treat their first project as a one-off transaction rather than the start of a portfolio.

Call one of our team or book an appointment at a time that works for you. We'll walk through your development plans, assess what finance structure makes sense for your situation, and connect you with lenders who actually fund projects like yours.

Frequently Asked Questions