Unlock the secrets to land purchase for townhouse builds

What Makes Townhouse Construction Finance Different

Lenders treat land purchase for townhouse construction differently to a standard house and land package because you're proposing multiple dwellings on one title. Most construction lenders will fund the land purchase and building costs under a single facility, but they'll assess your application against commercial lending criteria if you're building more than two dwellings, even when you intend to live in one of them.

In our experience with clients looking at dual occupancy or townhouse sites around Hampton East, particularly on the larger blocks south of Bluff Road where subdivision potential exists, the application process requires council plans and a fixed price building contract before any formal approval. You'll need development application approval from Bayside City Council showing how many dwellings are permitted, along with a registered builder willing to quote on the full project.

Consider a scenario where you're purchasing a 700-square-metre block near St James Park with approval for two double-storey townhouses. The lender will release funds for the land purchase first, then disburse building funds according to a progressive drawdown schedule as each stage of construction completes. Because you're building two separate dwellings, some lenders classify this as a small-scale development rather than owner-occupier construction, which affects both your interest rate and the deposit required.

How the Progressive Drawdown Schedule Works

Construction funding is released in instalments based on your progress payment schedule, not as a lump sum. The lender holds the full approved loan amount but only charges interest on the amount drawn down at each stage, which means your repayments start low and increase as more funds are released.

Most construction lenders work to a five or six-stage drawdown: land purchase, slab down, frame up, lockup, fixing, and practical completion. Your builder submits a progress claim at each stage, the lender arranges a progress inspection to confirm the work matches the claim, then releases the next tranche of funds directly to the builder. You'll pay a Progressive Drawing Fee for each inspection, typically between $200 and $400 per drawdown depending on the lender.

For townhouse projects, some lenders require both dwellings to reach the same construction stage before releasing funds, while others allow staggered progress payments if the builder is working on the homes sequentially. The distinction matters because it affects your cash flow during the build. If you're paying sub-contractors for plumbers or electricians on one townhouse while waiting for the other to catch up before the next drawdown, you may need access to additional funds in the interim.

Deposit Requirements and Genuine Savings

When you're purchasing land for townhouse construction, lenders typically require a larger deposit than they would for a single dwelling. Expect to provide between 15% and 20% of the total project cost as a deposit, which includes both the land purchase price and the full construction cost.

Hampton East sits in a popular development pocket due to its proximity to both the beach and Southland Shopping Centre, and suitable land in the area reflects that demand. Lenders will assess the combined land and construction package as a single loan amount, so if you're borrowing for a project valued around the upper range for dual occupancy builds in Bayside, your deposit requirement could be substantial. Unlike standard construction loans where you might access high LVR lending with mortgage insurance, most lenders cap townhouse construction at 80% LVR regardless of your financial position.

Your deposit must also demonstrate genuine savings unless you're using equity from an existing property. That means funds held in your account for at least three months prior to application, or equity you can prove has been accumulated over time rather than gifted or borrowed just before you apply.

Interest-Only Repayments During Construction

Most lenders offer interest-only repayment options during the construction phase, which keeps your costs down while you're not yet living in or renting the property. Because the loan only charges interest on the amount drawn down, your repayments increase gradually as each stage completes rather than starting at the full loan amount from day one.

This structure works particularly well when you're building townhouses because the construction period is often longer than a single dwelling, sometimes extending to 12 or 18 months depending on the builder's schedule and council inspection timelines. During that period, you're often still paying rent or a mortgage elsewhere, so minimising your repayments on the construction loan makes the project more manageable.

Once construction reaches practical completion, the loan converts to a standard principal and interest mortgage, or remains interest-only if you're treating one or both townhouses as investment properties. If you're planning to live in one and sell or rent the other, you'll need to discuss the end structure with your lender during the application so they can assess your borrowing capacity accordingly.

Fixed Price Building Contracts and Cost-Plus Arrangements

Lenders will only approve construction finance against a fixed price building contract, not a cost-plus contract where the final price can vary. The contract must show a total build cost with a clear breakdown of each stage, and it must be signed by a registered builder with adequate insurance.

For townhouse construction, some builders quote a single fixed price for both dwellings, while others provide separate contracts for each. Either structure works for lending purposes as long as the total cost is locked in and the progress payment schedule aligns with the lender's drawdown stages. If your builder's payment schedule has seven stages but your lender only disburses at five, you'll need to negotiate with the builder to adjust their claim timing or be prepared to cover the gap yourself between drawdowns.

In a scenario where you're working with a project home builder using a standard design for both townhouses, the fixed price contract is usually straightforward. If you're doing a custom design with an architect and a builder quoting on plans that are still being refined, you'll need to finalise everything before the lender will issue formal approval. That includes all council approvals, engineering reports for the site, and any requirements around stormwater, drainage, or bushfire overlays that apply in certain parts of Bayside.

Timing Requirements and the Disclosure Date

Most construction loan approvals require you to commence building within a set period from the Disclosure Date, which is the date the lender issues your formal loan documents. That period is typically six months, but some lenders allow 12 months depending on the circumstances.

If you're purchasing land in Hampton East that requires subdivision or additional council approvals before you can start construction, the six-month window can become tight. Some buyers purchase the land first under a standard home loan, then refinance to a construction facility once all approvals are in place and they're ready to build. That approach costs more in the short term because you're paying interest on the land without any drawdown benefits, but it removes the pressure of trying to meet the lender's commencement deadline while you're still working through council processes.

Another option is to negotiate an extended approval period with your lender at the time of application, particularly if you can demonstrate that delays are due to council timelines rather than your own project management. Lenders are often willing to extend the commencement period if you're transparent about the timeline from the start.

When to Speak with a Broker About Your Project

Construction finance for townhouse builds involves more variables than a standard land and build loan, and not all lenders offer the same terms for multi-dwelling projects. Some will only lend on dual occupancy if you're owner-occupying one of the dwellings, others require you to sell one upon completion, and a few will fund the project as an investment regardless of your intentions.

If you're at the stage where you've identified a block in Hampton East with development potential, or you've already secured land and you're refining your build plans, that's the right time to discuss your construction loan application options. Aviser Finance works with lenders across Australia who fund townhouse and dual occupancy projects, and we can structure your facility to match both your build timeline and your plans for the completed dwellings.

Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions