Property development can be a significant investment, and having the right funding structure in place is one of the most important parts of getting a project off the ground.

Whether you’re planning a residential development, townhouse project, commercial development or construction project, construction finance can provide the capital required to move from planning and acquisition through to completion.

But how do construction loans actually work in Australia? What do lenders look for, and how are construction funds released?

This guide explains the basics of construction loans and what developers should consider before applying.

What Is a Construction Loan?

A construction loan is a type of property finance designed specifically to fund the costs associated with building or developing a property.

Unlike a standard property loan, where the full loan amount may be advanced at settlement, construction funding is generally provided progressively as the project reaches agreed stages.

Construction finance may be used for expenses such as:

• Building and construction costs
• Labour and contractor costs
• Materials
• Site preparation
• Professional fees
• Development-related expenses
• Other approved project costs

The exact funding structure depends on the lender, project and individual circumstances.

How Do Construction Loans Work?

Construction loans typically operate through progressive drawdowns.

Rather than receiving the entire approved facility upfront, funds may be released as construction milestones are completed.

A typical process may look like this:

1. Site Acquisition

The developer acquires the property or secures the site required for the project.

2. Development Assessment

The lender reviews the proposed development, including the property, construction costs, feasibility and overall funding requirements.

3. Loan Approval

If the proposal meets the lender’s criteria, a construction facility may be approved with agreed terms and conditions.

4. Construction Begins

Once the required conditions have been met, construction can commence.

5. Progressive Drawdowns

Funds are released in stages as construction progresses and the relevant milestones are verified.

6. Project Completion

Once construction is completed, the developer may sell the completed properties, refinance the facility or use another agreed exit strategy to repay the loan.

What Are Construction Loan Drawdowns?

One of the key differences between construction finance and traditional property finance is the way funds are accessed.

With progressive drawdowns, the developer generally receives funding in stages rather than taking the entire facility at once.

For example, a project may have funding stages associated with:

• Site works
• Foundations
• Structural works
• Lock-up
• Internal completion
• Practical completion

The exact stages and drawdown requirements vary between lenders and projects.

This structure can help align the use of borrowed funds with actual construction expenditure.

What Can Construction Funding Be Used For?

Depending on the facility and lender, construction funding may support a range of development-related costs.

These can include:

Construction Costs

Materials, contractors and labour required to complete the project.

Professional Costs

Architects, engineers, consultants and other approved professional expenses.

Development Costs

Certain costs associated with preparing and progressing the development.

Property Acquisition

Some funding structures may incorporate the acquisition of the development site as part of the overall facility.

The lender will generally assess the complete project rather than looking at construction costs in isolation.

What Do Lenders Look At When Assessing Construction Finance?

Every lender has its own criteria, but several factors are commonly considered.

1. The Property

The location, value, type and suitability of the property can all be relevant.

2. Development Feasibility

The lender may assess whether the proposed development is financially viable.

This can include reviewing projected costs, expected revenue and profit margins.

3. Construction Costs

A detailed and realistic construction budget is important.

Significant cost increases or an incomplete budget can create uncertainty around the project.

4. Borrower Experience

Previous development or construction experience may be considered, particularly for larger or more complex projects.

5. Planning and Approvals

Depending on the project, lenders may want evidence of relevant planning approvals, permits or other required documentation.

6. Exit Strategy

The lender needs to understand how the facility is expected to be repaid.

Common exit strategies may include:

• Sale of completed properties
• Refinance
• Sale of the development
• Other agreed repayment arrangements

How Much Can You Borrow for a Construction Project?

There isn’t one standard construction loan amount that applies to every development.

Funding can depend on factors such as:

• Property value
• Development costs
• Expected end value
• Loan-to-value ratio
• Borrower’s financial position
• Project feasibility
• Construction experience
• Exit strategy
• Location

For this reason, developers should assess the entire project funding requirement rather than focusing only on the maximum amount a lender may provide.

What Is LVR in Construction Finance?

LVR, or Loan-to-Value Ratio, measures the loan amount against the value of the underlying property.

For example, if a property is valued at $2 million and the loan is $1 million, the LVR would be 50%.

Construction finance can involve more complex calculations because lenders may consider the property’s current value, construction costs and expected completed value depending on the structure of the facility.

Developers should always confirm how the relevant lender calculates LVR before relying on a particular figure.

Why Can Construction Finance Be Difficult to Obtain?

Traditional lenders often have strict policies around property development and construction.

A project may face challenges because of:

• Limited development experience
• Unusual property or location
• Complex ownership structure
• Tight project timelines
• Changes in construction costs
• Planning or approval issues
• Existing debt
• Complex exit strategy

This doesn’t necessarily mean the project cannot be funded.

A specialist funding provider may be able to assess the scenario based on the overall circumstances and available security.

Construction Finance for Complex Scenarios

Not every development fits neatly within traditional lending criteria.

Developers may need funding when:

• A bank’s assessment timeline doesn’t match the project deadline
• The project structure is unusual
• Additional funding is required
• The developer has an existing property portfolio
• The project involves complex security
• Traditional lending isn’t suitable

In these situations, speaking with a specialist funding provider early can help developers understand what options may be available.

How to Prepare for a Construction Loan Application

Before approaching a lender, developers should have a clear understanding of their project.

It can help to prepare:

Property Details

Information about the development site and existing property.

Development Plans

Plans, approvals and relevant project documentation.

Construction Budget

A detailed estimate of expected construction and development costs.

Feasibility

Projected revenue, costs and expected project outcome.

Funding Requirement

A clear explanation of how much funding is required and how it will be used.

Exit Strategy

A realistic plan for repaying the facility.

Having this information ready can make it easier for a lender to understand the opportunity and assess the scenario.

Construction Loans vs Traditional Property Loans

The two types of finance serve different purposes.

The appropriate option depends on the purpose of the funding and the individual circumstances.

Is Construction Finance Right for Your Project?

Construction finance may be worth considering if you need funding to develop or construct a property and require a facility structured around the project’s stages.

However, construction finance isn’t suitable for every project.

Before proceeding, consider:

• Total project costs
• Available equity
• Property value
• Expected completed value
• Construction timeline
• Expected revenue
• Repayment strategy
• Potential cost increases

Professional financial, legal and tax advice may also be appropriate depending on your circumstances.

Construction Funding with MULTIFUNDS

At MULTIFUNDS, we understand that property development funding isn’t always straightforward.

We work with property developers, business owners, investors and brokers to explore funding solutions for a range of scenarios.

Our funding solutions include:

• Construction Funding
• Bridging Finance
• First Mortgages
• Second Mortgages
• Property-Backed Funding
• Cash Flow Support

With up to 75% LVR in Metro Areas* and approvals in as little as 48 hours*, MULTIFUNDS can help you explore funding options when traditional lending doesn’t fit your requirements.

Planning a Development?

Submit your scenario to MULTIFUNDS today.

📞 1300 634 256
🌐 multifunds.com.au

Subject to lending criteria, assessment, security and location. Funding availability and terms vary depending on individual circumstances.