What Are Development Finance Loans for Unit Sites?

Development finance isn't designed for first home buyers.

It's structured for property developers who want to purchase land, subdivide it, or build units to sell. If you're looking to buy your first home, even on a small block with development potential, you'll need a standard home loan instead. First home buyers typically use residential lending, which works differently in almost every way.

This article covers how development finance works when you're purchasing a unit development site, what lenders assess, and how the funding structure differs from a standard mortgage.

Who Actually Uses Development Finance?

Development finance is for individuals or entities buying land with the intention to subdivide, build multiple dwellings, and sell them. You're not buying a home to live in. You're buying a site to turn into a project that generates profit.

Lenders treat this as a business transaction. They'll assess your experience as a developer, your business financials, and the viability of the project itself. If you're buying a property to live in while you subdivide the back half, that's a different scenario and requires a residential loan with equity release or construction funding later.

How Much Deposit Do You Need for a Development Site?

Most lenders require a deposit of at least 30% to 40% of the land acquisition cost. Some will lend up to 70% of the site value, but that's not common for inexperienced developers or projects without presales.

The deposit comes from cash, equity in other properties, or a combination of both. If you're using equity from your home, the lender will assess your total loan to value ratio (LVR) across all properties. They'll also factor in the development costs when calculating how much they're willing to lend overall.

Consider a developer purchasing a site in Oakleigh for subdivision into four townhouses. The land costs $1.2 million. With a 30% deposit, they'd need $360,000 upfront. If they're releasing equity from an existing investment property worth $900,000 with a $400,000 loan, they could access around $280,000 in usable equity, depending on the lender's servicing assessment. They'd still need to find the remaining $80,000 in cash or negotiate a higher LVR with a specialist lender, which typically means higher interest rates.

What Do Lenders Assess Before Approving a Development Loan?

Lenders assess three main areas: you, the site, and the project.

They'll review your business financials if you're operating as a company or trust, or your personal tax returns if you're buying in your own name. They want to see income, assets, and a track record of managing debt. If you've completed a development before, they'll ask for details. If you haven't, they'll scrutinise the project much more carefully and may require presales or a lower LVR.

The site itself needs to have development approval or be close to it. Some lenders will fund land acquisition before a development application is submitted, but the loan amount is usually lower, and the interest rate higher. Most prefer to see DA approval in place before settlement.

The project feasibility is critical. They'll want to see projected costs, expected sale prices, and the timeline from acquisition to completion. If the numbers don't show enough margin to cover interest, cost overruns, and still deliver profit, they won't lend. A feasibility study prepared by a quantity surveyor or development consultant helps, but lenders will apply their own assumptions to your figures.

How Does the Loan Structure Work?

Development finance is typically split into two stages: land acquisition and construction.

The first loan covers the purchase of the site. You'll pay interest on this amount from settlement until the project is complete. Most development loans are interest-only and charged at a variable interest rate, which is higher than a standard home loan. Rates vary depending on the lender, your experience, and the project risk, but expect something above what you'd pay on an investment loan.

Once construction begins, the loan increases to cover building costs. Funds are released in stages as the build progresses, usually after each phase is inspected and verified by the lender's valuer. You're paying interest on the drawn amount, which grows as the project continues.

The loan is repaid when the units are sold. If you're keeping one or more units as investments, you'll need to refinance those into standard investment loans and repay the development facility for the rest.

What Happens If You Don't Have Council Approval Yet?

Some lenders will provide land acquisition finance before you have development approval, but the terms are less favourable. You'll typically borrow a lower percentage of the purchase price and pay a higher interest rate until the DA is approved.

This structure is sometimes called land development finance or pre-DA funding. It's useful if you've found a site with strong development potential but need to secure it before someone else does. The risk is that your development application could be refused or delayed, leaving you holding land you can't develop and a loan charging higher interest than you planned for.

If the DA is refused, you'd need to sell the site or hold it long-term, which might mean refinancing into a different loan type. That's why most developers prefer to exchange with a DA approval condition or wait until council approval is confirmed before committing.

What's the Exit Strategy?

Every development lender will ask how you're planning to repay the loan. The most common exit strategy is selling the completed units. You'll need to show projected sale prices based on recent comparable sales in the area and demonstrate that the expected revenue covers the loan amount, interest, and costs.

If you're planning to keep some units, you'll refinance them into standard investment loans. The lender will want to see that you can service those loans based on rental income and your other income sources. You'll still need to sell enough units to repay the bulk of the development facility.

In some cases, developers use mezzanine finance or bring in a joint venture partner to reduce the amount they need to borrow from the primary lender. These structures add complexity but can make a project viable when the numbers are tight.

How Do Interest Costs Affect the Project?

Interest on a development loan is capitalised, meaning it's added to the loan balance rather than paid monthly. By the time the project is complete, the total debt includes the original loan amount plus all the accumulated interest.

If the development timeline blows out, the interest keeps accruing. A project expected to take 12 months that stretches to 18 months can add tens of thousands in unplanned interest costs. Lenders factor this into their feasibility assessment, but you need to build a buffer into your own projections.

In our experience, the projects that run into trouble are the ones where the developer underestimates the timeline or overestimates sale prices. The margin that looked comfortable on paper disappears when the project takes longer or the market softens.

Can You Use Development Finance If You're Self-Employed?

Yes, but lenders will assess your business financials closely. If you're operating as a sole trader, they'll review your tax returns and business activity statements. If you're buying through a company or trust, they'll want to see company financials, director guarantees, and evidence of cash flow.

Self-employed borrowers often have more flexibility in structuring their income, but development lenders apply stricter serviceability tests than residential lenders. They'll look at net profit, not just turnover, and they'll assess your ability to service both the development loan and any other debt you're carrying.

If your business is new or your income fluctuates, some lenders won't proceed. Others might, but they'll require a higher deposit or additional security.

What About Second Mortgages or Mezzanine Funding?

If the primary lender won't provide enough funding to complete the project, you might use a second mortgage or mezzanine finance to fill the gap. This is additional debt secured against the same site, ranking behind the first mortgage.

Second mortgage lenders charge higher interest rates because they're taking on more risk. If the project fails and the site is sold, the first mortgage is repaid before the second mortgage lender sees anything.

Mezzanine finance is typically used for larger projects where the developer has exhausted their borrowing capacity with the primary lender but still needs more capital. It's not common for small-scale subdivisions or townhouse developments unless the numbers are very tight.

How Does FinancePath Help with Development Funding?

We work with developers who need land acquisition finance, construction funding, or a combination of both. We'll assess your project, discuss the structure that makes sense, and connect you with lenders who fund developments in your area.

Development finance isn't our core focus, but we've structured funding for subdivisions, townhouse developments, and small unit projects across Melbourne. If your project is straightforward and the numbers work, we'll find a lender. If it's more complex, we'll refer you to a broker who specialises in development finance full-time.

Call one of our team or book an appointment at a time that works for you. We'll walk through your project, clarify what's needed, and let you know if we're the right fit or if you'd be better served by a specialist in this space.

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