The way to fund land purchase for townhouse construction

Purchasing land in Albert Park with the intention to build townhouses requires a land and construction package that releases funds in stages rather than as a single lump sum.

Albert Park's proximity to the bay and Melbourne's CBD has made it increasingly attractive for townhouse developments, particularly on larger blocks where single dwellings once stood. The area's character protection overlays and heritage restrictions mean that suitable land for townhouse construction tends to command premium prices, often between $1.5 million and $3 million for a block that can accommodate two or three townhouses. Funding both the land purchase and the subsequent construction requires an understanding of how progressive drawdown works and what lenders expect before they'll commit to a project of this scale.

How Land and Build Loans Release Funds

A land and build loan splits your borrowing into two distinct phases. When you settle on the land purchase, the lender advances the full amount needed for that component. Once construction begins, funds are released in stages according to a progress payment schedule tied to specific building milestones rather than all at once.

Consider a scenario where you're purchasing a 600-square-metre block near Albert Park Lake for $2.1 million with plans to construct two townhouses at a combined cost of $1.4 million. Your lender would advance the $2.1 million at settlement to secure the land. During construction, they would release the $1.4 million in instalments, typically at foundation stage, frame stage, lockup stage, fixing stage, and completion. Each drawdown happens only after a progress inspection confirms the work is complete to the required standard.

Between land settlement and construction commencement, you're paying interest only on the land component. Once construction begins and funds are progressively drawn down, you only pay interest on the total amount released to that point. If $400,000 has been drawn for foundations and framing, your interest calculation is based on $2.5 million, not the full $3.5 million approved facility.

What Lenders Require Before Approving Townhouse Construction Finance

Lenders need to see council approval and a fixed price building contract with a registered builder before they'll formally approve construction funding. The development application must be finalised, not just submitted, because conditions attached to that approval directly affect what can be built and at what cost.

The building contract needs to specify the total cost, the payment schedule, and which party bears responsibility for variations. Most lenders prefer a fixed price contract over a cost plus arrangement because it limits their exposure to budget overruns. They'll also want confirmation that you plan to commence building within a set period from the disclosure date, typically six to twelve months, because land banking introduces different risks than active development.

Your borrowing capacity will be assessed differently for a townhouse project than for a standard home purchase. Lenders consider the end value of the completed townhouses, not just the land value, when determining how much they'll lend. If two completed townhouses in Albert Park would each be worth $2 million, the end value is $4 million. With a construction loan, lenders typically lend up to 80% of the lower of cost or completed value, which means you'd need to demonstrate genuine savings or equity to cover the remaining 20% plus costs.

The Progressive Payment Schedule and Who Manages It

The progress payment schedule is usually structured around five or six key construction milestones. Each payment corresponds to a tangible stage of completion rather than a time period, which protects both you and the lender from paying for work that hasn't been verified.

A typical schedule might release 10% at base stage, 15% at frame stage, 35% at lockup, 25% at fixing, and 15% at practical completion. Before each payment is authorised, the lender arranges a progress inspection, usually through a third-party valuer or quantity surveyor who confirms the work meets the standard described in the contract. This inspection attracts a progressive drawing fee, typically between $300 and $600 per drawdown, which is either paid upfront or capitalised into the loan.

Your builder will invoice according to the agreed schedule, and those invoices trigger the inspection and subsequent drawdown. You don't control the timing directly. The builder completes the stage, raises the invoice, the inspection occurs, and the lender releases funds to the builder. This sequencing means cash flow planning becomes critical if you're coordinating multiple trades or managing variations that fall outside the fixed price contract.

Interest-Only Repayment Options During Construction

Most construction funding includes interest-only repayment options during the building phase, which can extend for twelve months or longer depending on how quickly the project progresses. This structure acknowledges that you're unlikely to have rental income or occupancy during active construction, so requiring principal and interest repayments would strain cash flow unnecessarily.

Once construction is complete and you either occupy, sell, or lease the townhouses, the loan typically converts to principal and interest repayments at that point. Some borrowers choose to refinance into a standard investment loan at completion if they intend to retain the properties as rental assets, particularly if they can secure a lower interest rate or more suitable loan features once the construction risk has been removed.

If you're planning to sell one or both townhouses upon completion, the lender will want to understand your exit strategy before approving the initial facility. Selling off the plan or shortly after completion to repay the construction debt is common, but lenders will assess whether the local market can absorb that stock at the projected price point. In Albert Park, where townhouse stock is limited compared to apartments, this tends to be less of a concern than in outer suburbs with higher supply.

Access Construction Loan Options from Banks and Lenders Across Australia

Not all lenders offer construction finance for multi-unit townhouse developments, and those that do often have different criteria around location, builder credentials, and your own financial position. Working with a broker who can access construction loan options from banks and lenders across Australia means you're not limited to a single lender's policy or appetite for this type of project.

Some lenders have geographic restrictions and won't fund developments in certain postcodes. Others require the builder to hold specific insurance or have a minimum number of years in operation. A few lenders cap the loan amount for townhouse construction at a lower threshold than for single dwellings, which can create problems if your total project cost exceeds their internal limits. Knowing which lenders will consider your particular scenario in Albert Park, and what they'll need to see in terms of documentation and deposit, can determine whether your project proceeds or stalls before it begins.

If you're ready to explore how construction finance would apply to a specific site or project you're considering, Aviser Finance can walk through the numbers and lender options that align with your plans. Call one of our team or book an appointment at a time that works for you.

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