Multi-Unit Construction Loans: The Pros and Cons

Development finance for multi-unit projects works differently to a standard home loan.

If you own a block in Brighton or you're considering one, and you want to build two, three or four dwellings rather than a single home, lenders treat the application as a construction project with staged funding. You'll need council approval, detailed costings, and a registered builder before any lender will consider the application. The loan amount draws down progressively as the build reaches defined milestones, and you only pay interest on what's been released so far.

How Multi-Unit Construction Funding Differs From a Standard Home Loan

A construction loan for a multi-unit development releases funds in stages tied to your progress payment schedule, not as a lump sum at settlement. The lender holds the full approved amount and releases portions after each progress inspection confirms work has been completed. That means if your loan amount is approved for $1.2 million and the first stage payment is $150,000, you're charged interest only on that $150,000 until the next drawdown occurs.

Lenders also assess the project differently. They'll want to see your development application approval from Bayside City Council, a fixed price building contract with a registered builder, and a quantity surveyor's report that verifies the costings. Many lenders apply a loan-to-value ratio that's more conservative than a standard home loan, often capping at 80% without lender's mortgage insurance, and some won't lend at all if you're planning to act as an owner builder.

Council Approval and Development Application Requirements

You cannot access construction funding until your development application has been approved by Bayside City Council. Lenders require formal planning approval before they'll issue a loan offer, which means the timeline for finance depends on how long the council process takes. In Brighton, dual occupancy and multi-unit developments often face longer approval periods due to heritage overlays, neighbourhood character considerations, and resident objections.

Once council approval is granted, the lender will also review the approved plans to confirm the scope matches the costings in your fixed price contract. If the plans show a three-storey build but the contract only prices for two storeys, the lender will request clarification before proceeding. That's why it's worth involving your broker early, ideally before you lodge the development application, so any issues that might affect finance are identified while you still have flexibility to adjust the design.

Progressive Drawdown and How Payments Are Structured

Most construction projects for multi-unit developments follow a five or six-stage progressive drawdown. Typical stages include base stage (once the slab is poured), frame stage (once the frame and roof are up), lock-up stage (once external walls, windows and doors are installed), fixing stage (once internal fittings like cabinetry and tiling are complete), and practical completion (once the building is ready for occupation and council issues the occupancy certificate).

Each time your builder requests a progress payment, the lender arranges an inspection. If the work matches the stage claimed, the lender releases the funds directly to the builder. You don't handle the payment yourself. The builder typically invoices according to the progress payment schedule in the building contract, and those amounts should align with what the lender has agreed to release at each stage. If the builder requests more than the scheduled amount, the lender won't release it until the next stage is reached.

Lenders charge a progressive drawing fee each time funds are released, usually between $200 and $400 per drawdown. That's separate to the loan establishment fee and the valuation fee you pay upfront.

Interest-Only Repayments During Construction

During the construction phase, most lenders allow interest-only repayment options, which means you're only paying interest on the drawn-down amount rather than making principal and interest repayments on the full loan amount. That keeps your repayments lower while the project is underway and before any rental income or sale proceeds start flowing.

Once construction reaches practical completion, the loan typically converts to a standard principal and interest loan, or in some cases remains interest-only if you're holding the units as investment properties. The construction loan interest rate is often slightly higher than a standard variable rate for an established property, reflecting the additional risk lenders assign to development projects. Rates vary depending on your deposit size, the loan-to-value ratio, and whether the lender considers the project residential construction or commercial development.

Fixed Price Contracts and Cost Overruns

Lenders prefer fixed price building contracts because they limit your exposure to cost increases. A cost-plus contract, where you pay the builder's actual costs plus a margin, creates uncertainty around the final amount, and most mainstream lenders won't approve construction funding on that basis unless you have significant equity or cash reserves to cover potential overruns.

Even with a fixed price contract, there are scenarios where additional costs arise. Variations requested after the contract is signed, unforeseen site conditions like contaminated soil or rock, and delays that push the build past the contract's sunset clause can all add to the final bill. If your approved loan amount doesn't cover the additional expense, you'll need to either provide the shortfall from your own funds or apply for a loan top-up, which requires another assessment and may not be approved if your borrowing capacity has changed.

Consider a buyer who purchased a 700-square-metre block near Were Street in Brighton with approval to build a duplex. The fixed price contract was $950,000, and the lender approved a construction loan for 75% of the combined land and build cost. Midway through the build, the builder discovered bluestone footings from an old structure that required specialist removal, adding $35,000 to the project cost. The buyer had to cover that amount from savings because the lender wouldn't increase the approved loan amount without a full revaluation, and the valuer wouldn't increase the as-complete valuation based on unforeseen site remediation.

When a Construction to Permanent Loan Makes Sense

A construction to permanent loan allows you to roll the construction funding into a standard home loan or investment loan once the build is complete, without needing to refinance or reapply. That saves on establishment fees and valuation costs, and it means you're dealing with one lender throughout the entire process.

Not all lenders offer this structure for multi-unit projects, particularly if you're planning to sell one or more of the completed dwellings rather than hold them all. Some lenders will only provide a construction to permanent loan if you're retaining all units as investment properties or if you're planning to live in one and rent the others. If your exit strategy involves selling down part of the development to reduce debt, you may need to structure the loan as construction-only and then refinance or discharge portions as each sale settles.

The Pros of Multi-Unit Construction Loans

You only pay interest on funds as they're drawn down, not on the full loan amount from day one. That can reduce your holding costs significantly during a build that takes nine to twelve months. You also have access to construction loan options from banks and lenders across Australia, which means your broker can compare rates, fees, and drawdown structures to find the one that suits your timeline and cash flow.

Multi-unit developments in Brighton allow you to create multiple income streams or sell down part of the project to recover capital, which isn't possible with a single dwelling. If land values continue to climb and construction costs stabilise, the completed project can deliver a strong return, particularly if you've secured a block close to Bay Street, Church Street or the foreshore where demand for new townhouses and duplexes remains high.

The Cons and What Can Go Wrong

Construction timelines often blow out due to weather, material delays, and subcontractor availability. Every month the build runs over schedule is another month you're paying interest without rental income or sale proceeds to offset it. If you've borrowed to hold the land as well, that interest compounds quickly.

Lenders also reassess your borrowing capacity if your financial situation changes during the construction phase. If you lose employment or your rental income drops, the lender can refuse to release further drawdowns, which halts the build and leaves you with a part-finished project and no clear way to complete it. That's rare, but it happens, and it's one reason why maintaining a buffer of accessible cash or equity during construction is important.

Council delays, neighbour disputes, and changes to planning rules can all derail a project before construction even begins. In Brighton, where neighbourhood character overlays are tightly enforced, a design that looked likely to gain approval can be knocked back or heavily modified, which changes the costings and may mean the project no longer stacks up financially.

If you're planning to build a multi-unit development in Brighton and you want to talk through how construction funding would work for your specific block and design, call one of our team or book an appointment at a time that works for you.

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