Construction and development finance.

Finance must follow the build

A completed home loan is secured against a finished property. A construction facility has to fund a property while its value, insurance position and physical state are changing. That is why the lender looks beyond the final purchase price or build budget.

The key questions are practical. Who owns the land? What contract has been signed? When are deposits and progress claims due? How will the lender confirm completed work? What happens if the cost increases? How is the loan repaid or refinanced when construction ends?

Homelend turns those questions into a funding sequence before an application is submitted. For a home build, that can mean coordinating the borrower, builder, valuer, insurer, solicitor and lender. For a development, it can also mean testing presales, equity, professional costs, interest during construction and the proposed exit.

Turnkey purchases and progress payment builds

A turnkey contract usually requires a deposit followed by the balance when the completed property settles. The developer carries most of the construction funding risk. The buyer still needs to meet the lender's approval conditions when settlement arrives, so an early approval should not be mistaken for a permanent guarantee.

Under a progress payment contract, the borrower owns the land or build as work proceeds and the lender releases funds in stages. The payment schedule is normally tied to milestones in the building contract. The lender may require invoices, evidence of work completed and updated valuations before a drawdown.

ANZ's current construction guidance, for example, says progressive drawdowns may require builder invoices matching the contract schedule and valuations at different stages. It also notes that construction lending may remain floating or flexible while funds are drawn. Other lenders can use different processes, so the selected lender's written conditions control the actual facility. See ANZ's construction drawdown guidance as one published example.

Labour only, fixed price and cost plus contracts create different risks. The adviser needs the actual contract rather than a label supplied in conversation.

The budget needs more than the build contract

The contract price may not include every cost needed to reach completion. A funding plan can also need to account for land, design, consent, engineering, surveying, valuation, utility connections, insurance, professional fees, interest during construction and a contingency for approved changes or overruns.

A contingency is not spare spending money. It is a buffer for uncertainty. The appropriate amount depends on the contract, site, stage of design and lender policy. We do not publish one universal percentage because that would imply a precision that does not exist.

Before applying, we reconcile the sources of funds against the full uses of funds. That makes it clear which costs are covered by borrower equity, which are financed and which remain unconfirmed.

Valuation and drawdown conditions

Many lenders assess both the current position and the value expected at completion. A registered valuation may therefore include an as is value and an as if complete value based on the plans, specifications and contract.

The valuation does not replace cost control. If the build changes, the lender may require approval before it funds the variation. ANZ's published guidance tells borrowers to keep invoices, variations, payments and correspondence, and to discuss overruns before committing to extra costs. That is sensible administration regardless of lender.

At each drawdown, there may be a gap between the builder's payment date and the lender's processing requirements. We plan the evidence and timing early so that an ordinary progress claim does not become an avoidable funding emergency.

Construction exemptions do not remove lender assessment

The Reserve Bank lists qualifying construction loans among the exemptions from its bank LVR restrictions. It also lists construction of a new home and some recent new build purchases among DTI exemptions. Those are macroprudential exemptions for bank lending limits; they do not force a lender to approve a loan or remove its affordability, security and credit checks.

Read the current Reserve Bank LVR restrictions and Reserve Bank DTI guidance for the official scope of those exemptions.

Development finance needs a defined exit

A property development facility may fund land acquisition, professional work and vertical construction, but the lender also needs a credible way out. That could be settlement of presold units, sale of completed stock, or refinance into longer term investment lending. Each exit has different timing and evidence.

The application normally needs a clear feasibility, sources and uses, borrower equity, professional team, consent position, build contract, valuation, programme and exit assumptions. The lender may test the developer's experience and the sensitivity of the project to higher costs, delays or lower sale proceeds.

Our job is to present the transaction coherently and identify where the proposal and lender policy do not yet match. We do not prepare valuations, legal documents, quantity surveying reports or tax advice. We coordinate those inputs with the finance application.

A practical sequence

1. Define whether the transaction is a turnkey purchase, owner build, major renovation or development.

2. Review the land position, contract, plans, consents, total budget and proposed timing.

3. Confirm borrower equity and decide which costs must be funded.

4. Compare lenders able to consider the transaction and identify their evidence requirements.

5. Submit one complete application with the funding sequence and exit explained.

6. Track conditions, valuation, drawdowns and changes through to completion or refinance.

For an overview of adjacent options, see property investment lending and business and commercial finance. The construction FAQs explain common contract and payment questions. To have a project reviewed, contact Homelend.

This page provides general information only. Construction and development funding depends on the contract, security, borrower, professional reports and lender criteria. Obtain legal, tax and construction advice from appropriately qualified professionals.