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[MoreMore Insights] Development Loan



In most industries, money will always be the very most important factor in any investment. The proper use of various financing will effectively maximise profits and reduce project risks. Before starting any development project, you first need to determine how much money you can borrow and how you will manage all the associated expenses. As a real estate developer, you need to understand how to finance and how banks will provide loans. Today, lenders are risk-sensitive and will consider you as an individual and your ability to repay the loan first, before considering the viability of the development itself. So the bank not only evaluates the risk of the development projects, but also evaluates the entire development project team.



What are the Advantages of Banks and Non-Banks?


There are various financing channels. Apart from personal financing, credit institutions and bank loans are the financing channels that most developers will use. Among them, bank loans are the most stable and have the lowest rates, which is one of the most important financing means. Although most banks want to lend to experienced developers, many major banks have tightened their lending standards. Therefore, second-tier banks, private investors and joint venture investors are increasingly becoming popular choices for developers.


For developers, the interest rate and cost of bank loans will be relatively low, but the approval is strict and the approval cycle is long. If the developer is experienced, a loan from the bank will be a very good choice. Non-bank loans also have great advantages, because their development loan products are flexible, and they have more advantages than big banking institutions in terms of approval conditions, loan cycle and loan limit. Banks generally need at least three months to complete the approval of the loan. Non-banks, on the other hand, can approve and lend in as little as four weeks, making them more competitive.


What is the LVR of Development Loans?



In terms of loan amounts, banks often expect developers to have invested some money in the project. Loans are usually made in accordance with the proportion of total development cost or TDC, called LVR. LVR generally does not exceed 70%. The specific proportion depends on the scale and nature of the project and the specific situation of the developer.




Loan Assessment Requirements


There are two most common types of loans in Australian real estate development, one is land purchase loan and the other is development loan. Among them development loan is relatively difficult part. For development loans, banks will take many factors into account when assessing the project risk. Generally, for the project itself, the following list of materials is required: developer qualification, contractor qualification, project manager qualification, project information, etc. The more important information includes land introduction, design data, project feasibility study, project manager and key consultant information, project valuation and project sales target and pre-sale status.


Pre-Sale Requirements



Lenders typically classify projects with four units as "residential" developments and apply looser lending criteria for such projects. For larger developments, most lenders will require some sort of pre-sale to minimise their development risk. The proportion of pre-sale projects required by different lenders before they are ready to hand over real estate development financing may vary, but could be around 60%. In 2022, some first-tier banks already increased the pre-sale requirements to 90%-100%, before they can consider lending. It is important to note that you cannot use pre-sale proceeds to fund your development, as they must be held in trust accounts.


How do Banks Release Funds


The development loan is not issued in a lump sum, but in stages, which is called Progress Claim. The principle is to lend money according to the construction quantity of the construction party in this stage, so as to reduce the risk of capital.


Application Time Control


Time and schedule control is critical for project development. Ideally, development loans can be approved before construction begins. But in practice, due to a variety of reasons, loans may not be approved on time, resulting in project delays, or developers have to use personal funds in the early stage of the development. Therefore, it is critical to hire an experienced project manager and a reliable mortgage broker. MoreMore Finance mortgage brokers have years of experience in commercial property development lending area, and can assist you with the most professional guidance.


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