If you have recently purchased a piece of land, building a small housing development can maximise your profits. However, if you need a loan to construct the development, it can be challenging to find the right lender.
The basics of a property development loan
Banks and other lenders provide property development loans to allow you to start construction on your property. Residential loans are for smaller developments up to four units. Commercial loans are for larger developments with more than four units. Unless you are a land developer, you will most likely be applying for a residential property development loan.
Residential property development loans
These loans are structured similarly to construction loans. With residential development loans, your lender will release your funds at the end of each of these construction stages:
- Downpayment
- Base
- Frame
- Lock-up
- Fixing
Any unused balance is released to your contractor after your project is completed.
Lending criteria
Banks and other lenders view residential developments as low-risk, meaning they have looser criteria and better features, including:
- Borrowing up to 80% of the value
- Higher interest rates than traditional investment loans
- Lower interest rates than commercial development loans
- Lenders may require you to have backup funds in case a problem arises during construction. This amount may vary, but traditionally it is between 10 and 20% of the loan amount.
- The loan may only pay for the labour and materials, which means you may have to pay for any approvals or other costs not directly associated with construction.
If you are trying to secure a residential property development loan, Mortgage House and its team of brokers can help. We know all the ins and outs of the home loan business, and we can find you the most competitive loan available.
