Get your development project off the ground
Development finance is filled with complexities and challenges. This page provides an overview of some of the key factors you need to know when getting finance, but each project has its own considerations. Get over the first hurdle of the project by contacting one of our specialists.
Low Rate Construction Loan
Land development cost
The government is incentivizing new builds which creates a great opportunity for, first home buyers, homeowners and investors.
The back my build initiative offers a variable interest rate as low as 1.79% with a 20% deposit. As a variable interest rate, the lender is able to change the rate at any time. However, if this occurs there are no fees incurred to change to a fixed rate at any time. The variable rate is available for up to 3 years from the initial drawdown of the loan.
Low rates can be accessed with a deposit as low as 10%. This is very attractive considering the current Loan-to-Value Ratio for investors which requires a 40% deposit. The interest rate offered from ASB scales with a 10%, 15% and 20% deposit.
Further government incentives for green housing mean that if you intend to build a property with a 6 Homestar rating or higher, you can receive a cash contribution of $2000.
Contact one of our specialists to see if a back my build loan is the best choice for your situation.
Land development cost
The the most common lending option for property developers is lending based on the cost of the project. This cost encapsulates the cost of the land/property and its development, as well as additional costs like, architecture, engineering and interest costs. Generally lending of this nature allows between 70% and 80% lending of the total cost. Some lenders may require some level of pre-sales before finance is approved in order to limit the perceived risk.
Gross Realisable Value
An alternative form of development finance is based on the end value of the project at completion, excluding GST. Using Gross Realisable Value, lending is generally between 65% and 75% of the end value which can allow you to potentially cover all the costs of the project. The benefit of this form of lending is pre-sales are typically not required.
As with most loans if the request for lending is backed by a deposit or capital then the lending has more chance of being approved. Providing a deposit reduces perceived risk to lenders and opens up more options. However, there are options with second tier lenders that don’t have as strict loan-to-value ratios, allowing lower deposits. The equity provided can be sourced by leveraging the existing equity in properties that you own.
Another factor that lenders will consider is your experience with property development. This is especially relevant for large scale projects but there are still options available if this is your first development project.
Generally, development loans are paid off at the completion of the project and it is common for the interest payments to be capitalised on top of the loan. This reduces the borrowers ongoing costs while the project is in development but means there is a lot riding on the sale of the property. The profit of the project is therefore a strong point that lenders will consider, and the analysis is based on a range of factors.
Project feasibility and budget
Lenders will assess whether they feel the project can be completed within the estimations of the borrower. This analysis will consider the expected costs with a buffer added into the calculation to cover any unforeseen expenses.
Before your application is approved, lenders may require relevant building plans and consents to be provided. A quantity surveyor report may also need to be produced but each lender has different criteria that need to be met before pre-approval.
The sale value will be influenced based on the location of the property and this is a factor which lenders will weight highly in their assessment of value.
Once the project is completed, the profit is only realised once the properties are sold. An exit strategy will outline your plans to realise this profit and in turn pay off the debt.
Development finance from a bank will generally provide the best interest rates but there will be more conditions that will need to be met, such as a quantity surveyor report. Banks will also cap their lending within their stated LVR ratios.
Second tier lenders
If your request for lending doesn’t fit within the banks criteria, then second tier lenders offer more flexible options which may suite you better. However, this comes at a cost with interest rates generally being higher than bank offerings. With second tier lenders you will need less personal capital and will be able to borrow more as a result.