The easiest way to fund a multi-unit development site

Funding a multi-unit development site in Cheltenham requires a different approach to standard home finance.

Most lenders treat the purchase of vacant land with a development application differently to an established home. You're financing both the site acquisition and the construction phase, often with multiple dwellings involved. The structure, deposit requirements, and approval process reflect that complexity. If you're looking at a block near the Southland precinct or along the Nepean Highway corridor where multi-unit zoning allows for townhouses or duplexes, understanding how construction finance works for these projects will shape your approach from day one.

How construction finance differs for multi-unit sites

Construction finance for a multi-unit development involves purchasing the land first, then drawing down funds progressively as the build progresses. Lenders assess both your ability to service the loan and the viability of the project itself. That means they'll want to see council approval, fixed price building contracts, and evidence that the end value justifies the total cost. The loan amount is split between the land purchase and the construction component, with funds released according to a progress payment schedule as specific milestones are met.

Consider a buyer purchasing a 700-square-metre block in Cheltenham zoned for dual occupancy. The land costs $750,000, and the approved build for two three-bedroom townhouses is quoted at $820,000 under a fixed price contract. The lender agrees to fund 80% of the total project cost, which is $1,256,000. The buyer provides a deposit of $314,000, settles on the land, and then draws down construction funds in instalments as the foundation is poured, the frame goes up, the lock-up stage is reached, and practical completion occurs. During construction, they only pay interest on the amount drawn down, not the full construction loan amount.

What lenders assess before approving development finance

Lenders assess your income, your deposit, the development application status, and the end value of the completed project. They want to see council approval in place, a registered builder engaged under a fixed price building contract, and a valuation that confirms the as-complete value exceeds the total loan amount. Some lenders will also require a quantity surveyor's report or a cost-plus contract breakdown to verify that the construction funding aligns with what the build actually requires.

The development application and council approval are critical. If you're buying a site in Cheltenham near the train station where higher-density zoning applies, you'll need to show that planning permits are either granted or in progress with a strong likelihood of approval. Lenders won't fund speculative land purchases without clarity on what can be built. They'll also assess whether you plan to occupy one unit and sell the other, or sell both upon completion, as this affects serviceability and risk.

How the progressive drawdown works during construction

Funds are released in stages, not as a lump sum. The typical progress payment schedule includes five or six draws: on signing the building contract, after the slab is laid, once the frame is up, at lock-up, during fixing, and at practical completion. Each draw requires a progress inspection by the lender's valuer or a third-party inspector, and you'll usually pay a Progressive Drawing Fee each time funds are released. That fee ranges from $200 to $400 per draw, depending on the lender.

In the Cheltenham example above, the first draw of $164,000 might be released after the slab is poured. The second draw of $205,000 follows when the frame is complete. By lock-up, another $164,000 is drawn. The remaining funds are released at fixing and practical completion. Throughout this period, the buyer pays interest only on the drawn amount, not the full $1,256,000. That keeps repayments manageable while construction is underway and no rental income or sale proceeds have been realised.

Deposit requirements and genuine savings

Most lenders require a deposit of at least 20% of the total project cost for a multi-unit development, even if you're an owner-occupier. That deposit must include genuine savings, and lenders will scrutinise where the funds have come from. If you're using equity from an existing property, that can form part or all of the deposit, but the combined loan-to-value ratio across all securities will still apply. Some lenders will go to 90% with lenders mortgage insurance, but that's rare for development projects and depends heavily on your income and the project's risk profile.

Interest-only repayments and exit strategy

During the construction phase, most lenders offer interest-only repayment options. Once the build is complete, the loan either converts to a standard principal and interest home loan if you're occupying one of the units, or you refinance or sell to exit the facility. If you're planning to sell both townhouses upon completion, the lender will want to see pre-sales or a clear marketing strategy to ensure you can repay the loan within a reasonable timeframe, usually 12 months post-completion.

Lenders also consider your exit strategy during the application. If you're holding one unit as an investment property and selling the other, they'll assess rental income and serviceability on the retained dwelling. If you're selling both, they'll look at comparable sales in Cheltenham to confirm that the market can absorb the stock at the projected sale price. The area's proximity to Southland and the bayside makes it appealing for young families and downsizers, which supports resale, but lender appetite varies depending on market conditions.

Choosing between a construction loan and a land and construction package

A land and construction package combines the land purchase and the build into a single facility, often with a requirement to commence building within a set period from the disclosure date. This structure works if you've already secured council approval and engaged a builder. If you're buying the land first and applying for permits afterward, a two-stage approach may be necessary: a land loan to settle the purchase, followed by a construction loan once approvals are in place. That adds complexity but gives you time to finalise plans and engage a registered builder without pressure from the lender's construction commencement deadline.

Working with a broker who understands development finance

Not all lenders offer construction finance for multi-unit developments, and those that do have different appetite levels depending on the project size, your experience, and the location. A broker can match your scenario to lenders who are actively funding development projects in the Bayside area and who understand the Cheltenham market. They'll also help you structure the loan to minimise interest costs during construction and ensure the progress payment schedule aligns with your builder's contract terms.

If you're considering a multi-unit development site in Cheltenham and want to understand how construction finance applies to your situation, call one of our team or book an appointment at a time that works for you.

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