What Construction Finance Looks Like for Apartment Development
Construction finance for purchasing land to build apartments works differently to a standard home loan. Lenders release funds progressively as construction reaches specific milestones, which means you only pay interest on the amount drawn down at each stage rather than the full loan amount from day one. The application process requires council approval, detailed costings from a registered builder, and a progress payment schedule that aligns with your development timeline.
In Malvern East, where multi-unit developments are increasingly common around Waverley Road and near the Caulfield Racecourse precinct, developers typically purchase land with the intention to commence building within a set period from the Disclosure Date. A construction to permanent loan covers both the land purchase and build costs in a single facility, which avoids the complexity of separate land acquisition and construction funding.
Consider a developer purchasing a 700-square-metre block near the Darling Road shopping strip with plans to build a four-apartment project. The total project cost includes land acquisition plus construction costs under a fixed price building contract with a local registered builder. Rather than borrowing the full amount upfront, the lender disburses funds according to a progressive drawdown schedule tied to construction stages: slab down, frame up, lock-up, fixing, and practical completion. At each stage, the lender arranges a progress inspection before releasing the next payment to the builder.
How the Progressive Drawing Fee and Interest Charges Work
You only pay interest on funds actually drawn down during construction, not on the total approved loan amount. If the land purchase requires $800,000 and construction costs are estimated at $1.6 million, you'll pay interest on the $800,000 land component immediately, then progressively on construction funds as they're released. Most lenders charge a Progressive Drawing Fee to cover the cost of inspections and administration at each drawdown stage, typically between $300 and $500 per draw.
During construction, most borrowers opt for interest-only repayment options, paying only the interest accrued on drawn funds rather than principal and interest. Once construction reaches practical completion, the loan typically converts to a standard principal-and-interest investment loan or remains interest-only if the property will be held as an investment.
The construction draw schedule is structured around a progress payment schedule agreed between you and your builder. For a fixed price contract, the builder submits invoices at each milestone, the lender inspects to confirm the stage is complete, and funds are released directly to the builder. If you're working under a cost plus contract or as an owner builder, the process involves more detailed documentation to pay sub-contractors including plumbers and electricians directly.
Ready to get started?
Book a chat with a Finance & Mortgage Broker at Plavin Finance today.
What Lenders Require Before Approving Land and Construction Finance
Lenders need a development application and council approval before they'll formally approve construction funding. In the City of Stonnington, where Malvern East is located, multi-unit developments require planning permits, and lenders want to see that permit finalised before settlement on the land. They'll also require detailed costings, council plans, a fixed price building contract from a registered builder with appropriate insurances, and evidence that you have enough equity or cash to cover the deposit plus any cost overruns.
If you're purchasing land and planning apartment construction, most lenders will lend up to 70% to 80% of the combined land and construction costs, depending on your experience as a developer and the project's scale. For a first-time developer, expect conservative lending limits and possibly a requirement to demonstrate construction experience or engage a project manager.
The construction loan application involves more documentation than a standard home loan, including quantity surveyor reports, engineering plans, soil tests, and evidence of pre-sales or exit strategy. If you're planning to sell the apartments upon completion, lenders want to see market evidence that the completed units will achieve the projected sale prices. If you're holding them as investments, they'll assess rental income projections and your ability to service the debt once the loan converts to principal and interest.
When to Use a Land and Build Loan Versus Separate Facilities
A land and build loan combines the land purchase and construction costs into one facility, which reduces establishment fees and simplifies the approval process. The alternative is purchasing the land with a standard investment loan or commercial loan, then applying separately for construction funding once council plans are finalised. The separate approach can work if there's a significant delay between land settlement and construction commencement, but it involves two applications, two sets of fees, and the risk that lending policies change between approvals.
For apartment construction in Malvern East, where land prices are high and construction timelines can extend due to council requirements or builder availability, a combined facility offers certainty. You know the total funding is approved subject to meeting drawdown conditions, and the interest rate is locked in at application rather than being subject to assessment again when construction is ready to start.
In a scenario where a developer purchases a corner block near Central Park with an 18-month construction timeline for a six-unit development, the combined loan ensures funding is available across the entire project. The developer pays interest only on drawn funds, manages cashflow during construction, and converts to a permanent loan structure once the project is complete and tenanted or sold.
How Plavin Finance Structures Construction Funding for Multi-Unit Developments
We work with lenders who understand quality construction projects and offer access to construction loan options from banks and lenders across Australia. Not every lender is comfortable with multi-unit developments, particularly for borrowers without extensive development experience, so identifying the right lender from the outset is critical. Some lenders specialise in projects up to four units, while others will consider larger-scale apartment developments with pre-sales in place.
The construction loan interest rate is typically slightly higher than a standard variable home loan rate, reflecting the additional risk and administrative complexity. However, because you only pay interest on drawn amounts during construction, the effective interest cost during the build phase is lower than if you'd borrowed the full amount upfront.
We also help structure the loan to align with your exit strategy. If you're planning to sell the completed apartments, the loan can be structured with an 18 to 24-month interest-only construction phase, giving you time to complete, market, and settle sales without principal repayments. If you're keeping the units as investments, we'll arrange a smooth conversion to a standard investment loan facility with competitive ongoing rates.
Call one of our team or book an appointment at a time that works for you to discuss your land purchase and apartment construction plans in Malvern East.
Frequently Asked Questions
How does a construction loan work when purchasing land for apartment development?
A construction loan releases funds progressively as your build reaches specific milestones such as slab down, frame up, and lock-up. You only pay interest on the amount drawn down at each stage, rather than the full loan amount from day one. The loan typically covers both the land purchase and construction costs in a single facility.
What do lenders require before approving construction finance for apartments?
Lenders need council approval or a planning permit, a fixed price building contract from a registered builder, detailed costings including council plans and engineering reports, and evidence you have enough equity to cover the deposit and potential cost overruns. Most lenders will lend up to 70% to 80% of the combined land and construction costs depending on your experience.
Do I pay interest on the full loan amount during construction?
No, you only pay interest on funds actually drawn down at each construction stage. If you purchase land for $800,000 and have $1.6 million in construction costs, you'll pay interest on the land amount immediately, then progressively on construction funds as they're released. Most borrowers choose interest-only repayments during the construction phase.
What is a Progressive Drawing Fee?
A Progressive Drawing Fee is charged by lenders to cover the cost of inspections and administration at each construction drawdown stage. It typically ranges from $300 to $500 per draw and is paid each time the lender releases funds to your builder following a progress inspection.
Should I use a combined land and build loan or separate facilities?
A land and build loan combines land purchase and construction into one facility, reducing fees and simplifying approval. Separate facilities can work if there's a long delay between land settlement and construction commencement, but involve two applications and the risk that lending policies change between approvals.
