Key Takeaways
- There are many types of property development finance available to developers, each one made for a specific goal or stage of a project.
- If you want to buy land, a common way to do so is with a regular loan. Most of the time, these are set up as interest-only loans with loan-to-value ratios (LVRs) that range from 65% to 80%.
- Construction loans are made for new buildings. They give out money in stages as work is done, and they only charge interest on the amounts that are taken out during construction.
- Bridging loans are short-term loans that help you pay for the time between buying a new home and selling your old one. They give you quick access to cash when you need it most.
- Residual stock finance is used to manage properties that haven't sold after a project is done. This gives developers more freedom with their cash flow.
- You can get money from banks and other traditional lenders, or from private and non-bank lenders, depending on what you need.
- The right facility for your project depends on its size, stage, and timeline. Getting advice from a financial expert can help make sure that the solution you choose fits with your goals.
- If you submit a well-prepared application that includes detailed project plans, feasibility reports, and proof of past experience, your chances of getting approved will go up a lot.
- Dark Horse Financial is an expert in property development finance and can help you find customised solutions with great terms.
You need a lot of money to get into property development. You will need funds to start and finish your project, whether you are a seasoned developer or a newcomer to the field. In Australia, you can get different kinds of property development loans depending on what you need. To choose the right one for your projects, you need to know the different types. If you want to buy land or buildings that are already there, for example, you’ll need a different kind of financing than if you want to build a new building.
Let’s talk about the different kinds of property development finance, such as traditional loans, construction loans, bridging loans, and residual stock finance, which are the most common.
What is Property Development Finance?
Property development financing in Melbourne is the different ways that developers can get money to buy, build, and finish properties in Melbourne, and this information is also useful for other parts of Australia. It is a type of financing that is specifically designed for property development projects, which often have high upfront costs, long timelines, and different levels of risk. Property development finance is different from regular home loans because it covers the whole life cycle of a development project, from buying land and building it to selling or renting the finished property.
This kind of financing is very important for developers who might not have enough money to pay for big projects on their own. It gives you the cash you need to pay for things like buying land, getting permits, hiring contractors, and managing the different stages of construction. Depending on the stage of the project, the developer’s financial situation, and the level of risk involved, property development finance can be set up in different ways.
Types of Property Development Finance
Let’s discuss the most common types of property development finance:
1. Traditional Loans
People usually use traditional term loans to buy land that is already developed or ready to be developed right away. While they wait for Development Approval, developers usually use traditional loans. Banks and other non bank lenders can offer traditional loans that are backed by the property or land being bought.
Key Features of Traditional Loans
- Loan-to-Value Ratio (LVR): Traditional loans usually offer an LVR of up to 65-80%, meaning you’ll need to provide a 20-35% deposit or additional equity contribution.
- Structure: Traditional property development loans are usually structured as interest-only loans.
Advantages of Traditional Loans
- Simplicity: Traditional loans are straightforward and easy to understand, making them an attractive option for developers.
- Accessibility: Traditional loans can be used by developers while waiting for Development Approval, allowing them to access land and properties immediately.
2. Construction Loans
The construction loan is the most common type of property development loan. Construction loans are made to pay for building new homes or making major repairs to old ones. These loans are usually for a short time and are given out in stages as the building goes up. The interest is added to the principal amount, and the whole thing will be paid off when the building is done.
Key Features of Construction Loans
- Drawdown Schedule: Construction loans are disbursed in stages, known as drawdowns, which correspond to different phases of the construction process.
- Loan Term: Property development construction loans usually have a term of 6 months to 2 years, depending on the complexity and size of the project.
- Exiting the Loan: Once the construction is completed, the developer must settle the loan in full.
Advantages of Construction Loans
- Flexibility: Construction loans offer flexibility in terms of the amount borrowed, which can be adjusted based on the progress and needs of the project.
- Short-Term Commitment: The short-term nature of construction loans means you’re not locked into a long-term financial commitment, giving you the flexibility to refinance or sell the property once the construction is complete.
3. Bridging Loans
Bridging loans are short-term loans that help you “bridge” the gap between buying a new home and selling your old one. These loans are great for developers who need money right away to buy a new property before they sell their old one.
Key Features of Bridging Loans
- Short-Term: Bridging loans are typically short-term, with loan terms ranging from 3 to 12 months.
- Interest-Only Payments: Borrowers usually make interest-only payments during the loan term, with the principal repaid in full at the end of the term.
- Interest Rates: Interest rates on bridging loans are generally higher than traditional loans due to the short-term nature and increased risk.
Advantages of Bridging Loans
- Quick Access to Funds: Bridging loans provide quick access to funds, allowing you to secure a new property without waiting for the sale of your existing one.
- Flexibility: Bridging loans offer flexibility in terms of repayment, with the option to repay the loan in full once the existing property is sold.
- No Need for Immediate Sale: You don’t need to have a buyer lined up for your existing property to secure a bridging loan, giving you more time to find the right buyer.
4. Residual Stock Finance
Residual stock finance is a type of loan that helps developers pay for the costs of properties that haven’t sold yet. This kind of financing is especially helpful for developers who have finished a project but still have units or properties that they haven’t sold yet.
Key Features of Residual Stock Finance
- Loan-to-Value Ratio (LVR): Residual stock finance typically offers an LVR of up to 50-70%, depending on the lender and the specifics of the project.
- Interest Rates: Interest rates on residual stock finance can be higher than traditional loans.
- Loan Term: The loan term for residual stock finance usually ranges from 6 to 18 months, depending on the lender and the specifics of the project.
Advantages of Residual Stock Finance
- Cash Flow Management: Residual stock finance helps manage cash flow by providing funds to cover the costs of unsold properties, allowing you to focus on marketing and sales efforts.
- Flexibility: Residual stock finance offers flexibility in terms of the amount borrowed, which can be adjusted based on the number of unsold properties.
- Short-Term Commitment: The short-term nature of residual stock finance means you’re not locked into a long-term financial commitment, giving you the flexibility to repay the loan once the properties are sold.
Banks vs. Non-Bank Lending Options
When developers need funding to build new homes, they usually have two choices: traditional banks or private lenders. Each has its own pros and cons, as well as its own rules for lending:
Banks: Traditional but with Strict Criteria
Banks are a common source of money for property development because they offer low interest rates. But their rules for lending are often very strict, which makes it hard for some developers to get loans.
Most banks want to see a strong credit history, a successful history of developing property, and a project that isn’t too risky. These requirements may be hard for new developers or those with less experience.
The approval process can take a long time, sometimes weeks or even months, because banks carefully check out the project and the borrower.
Banks usually like projects that are big, well known, and have predictable results. They might not be able to lend money for smaller or riskier projects.
Private Lenders: Flexible and Fast
Private lenders, on the other hand, offer a more flexible and easy-to-get option than traditional bank loans. They are often willing to pay for a wider range of projects, even ones that banks might think are too risky or out of the ordinary.
Private lenders are usually willing to take on more risk than banks if they can see a good exit strategy. This makes them a great choice for new developers.
Private lenders can give you money much faster than banks, sometimes in as little as 10 to 14 days. This speed is especially helpful for developers who need to move quickly to get a property or start building.
Private lenders will lend money for both small and large projects, so they are a good choice for developers of all sizes. They are also more willing to fund projects that are one-of-a-kind or have a higher risk.
One of the best things about private lenders is that they can give you loan terms that are just right for you. This includes customised repayment plans, interest only options, and flexible loan structures that are made to fit the project’s needs.
When to Choose Banks vs. Private Lenders
Choose Banks if you have a strong track record and a large, low-risk project.
Choose Private Lenders if you need faster funding, have a smaller or higher-risk project, or are a new developer. Private lenders offer flexibility, speed, and accessibility, making them a great option for unconventional or time-sensitive projects.
Securing the Right Property Development Loans Type
Here are some useful tips to help you get the best property development loan:
- Make sure you know exactly what your project will involve, such as the type of development (residential, commercial, or industrial), its size, and the time frame. This will help you figure out what kind of financing is best for you.
- Make a detailed budget that includes all costs, like buying land, building, getting permits, and having money set aside for emergencies. To see if your project is possible, lenders will want to see a well-planned budget.
- Think about what you need now and what you need in the future. Bridging loans or construction loans might be better if you need money right away. Traditional loans or residual stock finance might be better for projects that will take a long time.
- Find experts in development finance. Dark Horse Financial are experts in property development finance that work on projects of all sizes. If you work with us, we’ll find you the right lender with competitive rates and terms that work for you. Fill out our form today, and we’ll make it easy for you.
Closing Thoughts
Any developer who wants to be successful needs to get financing for property development. To do that, you need to know and understand the different kinds that are available in Australia.
You can buy land and buildings with traditional loans. Construction loans, on the other hand, give you more options and pay out in stages. Bridging loans give you quick access to money and let you use it for short-term needs. Lastly, residual stock finance helps keep cash flow steady for properties that haven’t sold yet in finished projects.
There are pros and cons to each type of financing. The best one for your project will depend on your needs, your financial situation, and the type of development you want to do.
Get The Right Property Development Financing Today
At Dark Horse Financial, we’re experts in helping developers secure the financing they need. We’ll help you choose the right financing option for you, offering the best rates and terms possible. Contact us today to learn more about how we can help.
