A construction loan for a multi-unit development site covers both the land purchase and the building costs, releasing funds progressively as each stage of construction is completed.
Bentleigh East has seen steady interest from small-scale developers, particularly along the Centre Road and North Road corridors where zoning allows for townhouse and unit developments. The typical scenario involves purchasing a site with an existing dwelling, obtaining council approval for demolition and construction of multiple dwellings, then accessing funds in stages as the build progresses. The lending structure differs substantially from a standard home loan because lenders assess both your capacity to complete the project and the end value of the finished units.
How Lenders Assess Multi-Unit Development Applications
Lenders evaluate the viability of the project before approving construction finance. They examine the development application, building contract, pre-sales if applicable, and your equity position. For a multi-unit site in Bentleigh East, most lenders require a minimum 30% deposit, though some specialist lenders will consider 20% if you have development experience or secured pre-sales. The assessment also includes a valuation based on both the current land value and the projected end value of the completed units.
Consider a buyer purchasing a development site near Patterson station with approval for four townhouses. The lender orders a valuation that confirms the land value and estimates the end value of all four completed units. If the total project cost is within 70% of that end value and the buyer can demonstrate sufficient equity, the application proceeds to formal assessment. The lender also reviews the fixed price building contract to confirm the builder is registered and the costs align with comparable developments in the area.
Progressive Drawdown and the Construction Draw Schedule
Funds are released according to a progressive drawdown schedule tied to construction milestones. You only pay interest on the amount drawn down at each stage, not the full loan amount. A typical schedule includes an initial drawdown for the land purchase, then further drawdowns at base stage, frame stage, lock-up stage, fixing stage, and practical completion. Each drawdown requires a progress inspection by the lender's valuer to confirm the work has been completed to the claimed stage.
The construction loan structure means you'll make interest-only repayments during the build period, calculated on the progressive balance. If the first drawdown for land purchase is $800,000 and the next stage drawdown is $200,000, you'll pay interest on $800,000 until that second drawdown is released, then on $1,000,000. Most lenders charge a Progressive Drawing Fee for each inspection and drawdown, typically between $300 and $500 per drawdown.
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Council Approval and the Commencement Condition
Most construction loans require you to commence building within a set period from the loan settlement date, usually six to twelve months. In Bentleigh East, the Glen Eira Council approval process for multi-unit developments can take several months, particularly if the development triggers objections or requires a VCAT hearing. You need to factor this timeline into your finance application because lenders won't settle a construction loan until you have an approved building permit and a signed fixed price building contract.
In a scenario where a buyer has purchased a site on East Boundary Road with approval for three units, the construction loan settles once the building permit is issued and the builder has been engaged under a fixed price contract. The lender's solicitor reviews the contract to ensure it includes a progress payment schedule that aligns with the lender's drawdown stages. If the builder's payment terms don't match the lender's schedule, the contract may need to be amended before settlement proceeds.
Land and Construction Package vs Separate Transactions
Some buyers purchase the land first using a standard investment loan or equity from an existing property, then apply for construction finance separately once council approval is obtained. Others structure the transaction as a land and construction package from the outset, settling both components under a single loan facility. The land and construction package approach can be more efficient if you already have council approval at the time of purchase, but it requires the lender to commit to the full project before construction commences.
The separate transaction approach gives you more time to finalise the development application and building contract without pressure from a commencement condition. However, you'll need sufficient equity or cash to fund the land purchase outright, then refinance into a construction facility later. For buyers in Bentleigh East purchasing sites that require rezoning or significant planning amendments, the separate transaction approach often makes more sense.
Interest Rates and Cost Plus Contracts
Construction loan interest rates are typically higher than standard variable home loan rates, reflecting the additional risk lenders take on during the build period. At current variable rates, construction finance for a multi-unit development might sit between 0.5% and 1.5% above a standard owner-occupied variable rate, depending on your deposit size and the lender's assessment of project risk.
Most lenders insist on a fixed price building contract rather than a cost plus contract for multi-unit developments. A cost plus contract allows the builder to charge actual costs plus a margin, which creates uncertainty around the final loan amount. Lenders prefer the certainty of a fixed price contract because it caps the total drawdown and reduces the risk of cost overruns. If your builder only offers cost plus terms, you'll need to approach a specialist lender who may accept that structure at a higher interest rate.
Owner Builder Finance and Registered Builders
Most mainstream lenders will not provide construction finance for multi-unit developments if you're building as an owner builder. The lender's requirement for a registered builder with appropriate insurance protects both you and the lender if the builder becomes insolvent or fails to complete the project. Owner builder finance is available through specialist lenders, but the deposit requirement increases to 40% or more and the interest rate will be higher.
If you're planning to act as project manager while engaging sub-contractors directly, you'll need to structure the arrangement so a registered builder holds the head contract and you manage the sub-contractors under their supervision. Some builders in the Bentleigh East area offer this type of arrangement for experienced developers, but it requires careful documentation to satisfy the lender's requirements.
Refinancing to Permanent Loan After Completion
Once construction reaches practical completion, most borrowers refinance from the construction facility into a standard investment loan or sell the completed units to repay the construction debt. If you're retaining the units as rental properties, refinancing into a standard investment loan will reduce your interest rate and remove the progressive drawing fees. The lender will require a final valuation of the completed development to confirm the end value supports the loan amount.
If you're selling the units, settlement of those sales repays the construction loan and any remaining balance becomes profit. In Bentleigh East, the demand for newly built townhouses near Patterson station and the local shopping precinct has remained consistent, which reduces the risk of holding completed stock while you find buyers. However, you'll need to factor holding costs into your project budget, including interest during the sales period and any ongoing council rates or body corporate fees.
Call one of our team or book an appointment at a time that works for you to discuss how construction funding can be structured for your development site in Bentleigh East.
Frequently Asked Questions
How much deposit do I need for a multi-unit development site?
Most lenders require a minimum 30% deposit for construction finance on a multi-unit development, though some specialist lenders will consider 20% if you have development experience or secured pre-sales. The deposit applies to the total project cost, including land purchase and construction.
Do I pay interest on the full loan amount during construction?
No, you only pay interest on the amount drawn down at each stage of construction. Interest is calculated on the progressive balance, so you'll pay interest on the land purchase amount first, then on the increasing balance as each construction stage is funded.
Can I use a cost plus building contract for development finance?
Most lenders require a fixed price building contract for multi-unit developments because it caps the total loan amount and reduces the risk of cost overruns. Cost plus contracts may be accepted by specialist lenders at higher interest rates.
How long do I have to start construction after the loan settles?
Most lenders require you to commence building within six to twelve months from the loan settlement date. You'll need an approved building permit and signed fixed price building contract before the construction loan settles.
Can I get construction finance as an owner builder?
Mainstream lenders generally won't provide construction finance for multi-unit developments if you're building as an owner builder. Owner builder finance is available through specialist lenders with a deposit requirement of 40% or more and higher interest rates.
