Development Loan

In most industries, securing funds is always a crucial aspect of any investment endeavor. Utilizing various financing options effectively can maximize returns while mitigating project risks. Before embarking on any development project, it's essential to determine how much funding you can access and how you'll manage associated expenses. For real estate developers, understanding financing methods and how banks provide loans is paramount.

Today, lenders are particularly sensitive to risk, prioritizing individual financial capacity and loan repayment ability before assessing the project's feasibility. Thus, banks evaluate not only the risk of the development project itself but also the entire project team.

What are the benefits of banking institutions versus non-banking ones?

There's a diverse array of financing channels available. Besides personal financing, credit institutions and bank loans are commonly used by developers. Bank loans, known for stability and lower interest rates, are a primary financing avenue. However, major banks have tightened lending standards, leading some developers to explore options like second-tier banks, private investors, or joint ventures.

For developers, bank loans offer relatively lower interest rates and cost, though they come with strict approval processes and longer timelines. Non-bank lenders, on the other hand, may offer flexibility in their development loan products, and often outperforming major banks in terms of approval conditions, loan cycles, and amounts. While banks typically take at least three to six months for full approval and disbursement, non-bank lenders can often do so within a few weeks, enhancing their competitiveness.

What's the maximum amount one can borrow with development loans?

Regarding loan amounts, banks usually require developers to invest some capital into the project. Loans are typically disbursed based on a proportion of the total development cost, known as the Loan-to-Value Ratio (LVR), which generally doesn't exceed 70%. The specific ratio depends on the project's scale, nature, and the developer's circumstances.

What are the loan assessment requirements?

In Australian real estate development, there are two primary types of loans: land purchase loans and construction loans. Construction loans, in particular, are more challenging. Banks assess project risks comprehensively for construction loans, considering factors such as developer qualifications, contractor credentials, project manager expertise, and project details like land status, design, feasibility studies, valuation, and sales objectives.

What are the pre-sale requirements?

Lenders typically classify projects with four units or more as residential developments, applying more strict lending criteria. For larger projects, most lenders require a certain level of pre-sales to minimize risk. The proportion of pre-sales required before lenders provide financing varies but could be around 60%. The pre-sale funds received, must be held in trust accounts and cannot be used for project funding.

How do banks release funds?

Development loans are disbursed in stages, known as Progress Claims, based on the construction progress to reduce capital risk.

How can one control the timing of loan applications?

Time and progress management are crucial in project development. Ideally, construction loans should be approved before construction begins. However, delays in loan approval can occur for various reasons, leading to project stagnation or developers needing to front construction costs. Thus, hiring an experienced project manager and a reliable mortgage broker is essential. MoreMore Finance's mortgage brokers, with extensive experience in commercial property development lending, can provide professional guidance and support for your development loan needs.