Understanding the Basics of Multi-Unit Construction Loans

Multi-unit construction projects in Bentleigh East require a different financing approach compared to building a single dwelling.

Whether you're developing two townhouses on a subdivided block near Centre Road or a trio of units close to the Bentleigh East Village, construction funding for multiple dwellings involves staged drawdowns, council-approved plans, and progress payment structures that align with how builders and sub-contractors are paid. Understanding how lenders assess these projects and release funds at each stage helps you manage cash flow and avoid delays during the build.

What Makes Multi-Unit Construction Loans Different from Standard Construction Finance

Lenders treat multi-unit developments as higher-risk projects compared to single dwelling builds. This means stricter serviceability assessments, higher deposit requirements, and more detailed scrutiny of your development application and fixed price building contract. Most lenders require a minimum 20% deposit, though some specialist lenders may consider lower equity positions if you have development experience or strong serviceability.

Your loan amount is released progressively as construction milestones are reached, with each drawdown subject to a progress inspection by the lender's valuer. This progressive drawdown structure means you only pay interest on funds already drawn, rather than the full loan amount from day one. The lender will also assess whether your project has council approval, whether you're using a registered builder under a fixed price contract, and whether the development meets local planning requirements specific to Bentleigh East.

How Council Approval Affects Your Construction Loan Application

You cannot proceed with a construction loan application until you have council approval for your multi-unit development. Glen Eira City Council, which governs Bentleigh East, has specific planning overlays and requirements for dual occupancy and townhouse developments, particularly regarding setbacks, vegetation removal, and car parking.

Lenders will require a copy of your planning permit as part of the application. They'll also want to see that your development application aligns with the final building plans and that you can commence building within a set period from when the loan is approved, typically within six to twelve months. If your council approval includes conditions that affect project costs or timelines, such as additional landscaping requirements or road contributions, these need to be factored into your total development budget and disclosed to the lender during assessment.

The Progressive Drawing Fee and How Progress Payments Work

Construction funding is released in instalments tied to specific building stages, not calendar dates. A typical progress payment schedule includes drawdowns at base stage, frame stage, lock-up stage, fixing stage, and practical completion. Each time you request a drawdown, the lender arranges a progress inspection to verify that the work has been completed to the claimed stage.

Most lenders charge a Progressive Drawing Fee for each inspection, typically between $300 and $600 per drawdown. Across a five or six-stage build, these fees add up, so they should be included in your settlement cost budget. The inspection ensures that the amount you're requesting aligns with the work completed, which protects both you and the lender from paying builders ahead of actual progress.

Consider a scenario where you're building two townhouses in Bentleigh East under a fixed price building contract. The builder requests payment for the frame stage, which represents 25% of the contract price. You submit a drawdown request to the lender, who engages a valuer to inspect the site. The valuer confirms the frames are up and weatherproof, and the lender releases funds directly to the builder. You begin paying interest on that additional amount from the drawdown date, while the remainder of the loan sits undrawn and incurs no interest.

Interest-Only Repayment Options During Construction

Most construction loans offer interest-only repayment options during the building period, meaning you're only required to pay interest on the amounts drawn down, not principal. This keeps repayments lower while the property is generating no income and you may still be paying rent or a mortgage elsewhere.

Once construction reaches practical completion, the loan typically converts to principal and interest repayments, though some lenders allow you to extend the interest-only period if you're holding the units as investments. If you plan to sell one or both townhouses on completion, an interest-only structure during construction minimises your holding costs and preserves cash flow. If you're retaining the properties as rentals, you'll need to demonstrate serviceability for the full loan amount at principal and interest rates once the interest-only period ends.

Cost Plus Contracts and Why Most Lenders Won't Accept Them

A cost plus contract means the builder charges you for the actual cost of materials and labour, plus a margin. While this gives flexibility during the build, it also means the final cost is unknown at the outset. Most mainstream lenders will not provide construction funding against a cost plus contract because they cannot assess the total loan amount required or verify that the project will stay within budget.

Lenders require a fixed price building contract with a registered builder before they'll approve a construction loan application. The contract must itemise the full scope of works, specify the progress payment schedule, and include clauses that protect you if the builder fails to meet agreed timelines or quality standards. If you're acting as an owner builder, construction finance becomes significantly harder to obtain, and you'll likely need to approach specialist lenders who charge higher interest rates and require larger deposits.

How Serviceability Is Assessed for Multi-Unit Developments

Lenders assess your ability to service the loan during construction and after completion. During the build, they'll consider your current income and existing commitments, plus the interest costs on progressively drawn funds. After completion, if you're holding the units as investments, they'll assess rental income at a discounted rate, typically 80% of market rent, and add that to your serviceability.

In Bentleigh East, where two-bedroom townhouses typically attract strong rental demand due to proximity to Bentleigh East Primary School and the railway station, lenders will use rental assessments based on comparable properties in the area. If you're planning to sell on completion, some lenders may accept pre-sale contracts as evidence that you can repay the loan, which can improve your serviceability position and potentially reduce the deposit required.

What Happens If You Need to Pay Sub-Contractors Directly

Under a fixed price building contract with a registered builder, you typically don't pay sub-contractors directly. The builder manages all payments to plumbers, electricians, and other trades, and you make progress payments to the builder according to the agreed schedule. However, if your builder encounters financial difficulty or disputes arise, you may find yourself needing to pay sub-contractors to keep the project moving.

Most construction loan agreements do not allow you to redirect funds to sub-contractors without the lender's approval, because the contract is between you and the head builder. If you're forced into this position, contact your lender immediately to discuss options. In some cases, lenders will allow direct payments if the builder has been terminated and you've engaged a new builder to complete the works, but this typically requires legal documentation and a revised progress payment schedule.

Choosing Between Land and Construction Packages and Buying Land Separately

If you don't yet own the land, you can finance the purchase and construction together through a land and construction package. The lender provides initial funding to purchase the suitable land, then releases additional funds progressively as the build advances. This approach requires a single application and avoids the need to refinance between land purchase and construction commencement.

Alternatively, if you already own a block in Bentleigh East or are purchasing land separately, you can apply for construction funding once you have council plans and a fixed price building contract in place. Owning the land outright or with existing equity can improve your borrowing capacity and may reduce the deposit required for the construction component, since the land itself contributes to your equity position. Many developers in Bentleigh East acquire older homes on large blocks, subdivide, demolish, and then build multiple townhouses, using the land equity to fund part of the construction costs.

If you're considering a development project and need clarity on how construction funding applies to your specific situation, call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions