Purchasing a multi-unit development site requires a different approach to standard property finance.
If you're considering a development opportunity in St Kilda West, the proximity to the beach, established cafe culture along Fitzroy Street, and strong rental demand make it an attractive location for townhouse or apartment developments. Securing the right construction funding structure becomes the difference between a project that proceeds smoothly and one that stalls before you break ground.
How construction loans differ for multi-unit developments
Construction loans for multi-unit sites release funds progressively as work is completed, rather than providing the full amount upfront. Lenders typically fund the land purchase separately, then advance construction costs according to a progress payment schedule tied to completion milestones. Each drawdown is subject to a progress inspection by a quantity surveyor or valuer who confirms the stage has been reached.
In our experience, developers purchasing a site on one of the wide streets running between Beaconsfield Parade and The Esplanade often underestimate how council approval timelines affect their finance structure. Most lenders require you to commence building within a set period from the Disclosure Date, usually between six and twelve months. If your development application takes longer than anticipated, you may need to renegotiate terms or risk the approval lapsing.
What lenders assess before approving development finance
Lenders examine four main areas when assessing a multi-unit development application. They review the feasibility study to confirm projected sale prices or rental yields justify the construction costs. They assess your experience as a developer or the track record of your registered builder. They evaluate the site itself, including zoning, council plans, and whether the location supports the proposed density. Finally, they calculate your equity contribution, which typically needs to be between 20% and 30% of the total project cost including land.
Consider a buyer who identifies a 600-square-metre site in St Kilda West zoned for multi-unit residential development. The land is purchased, and plans are approved for three two-storey townhouses under a fixed price building contract. The lender structures the loan in two stages: one facility for the land acquisition, and a second for construction. During the build, funds are released at five stages: slab down, frame up, lock-up, fixing, and practical completion. Each release requires a progress inspection, and the developer pays interest only on the amount drawn down so far, not the full approved limit.
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Fixed price contracts versus cost plus arrangements
Most lenders prefer a fixed price building contract for multi-unit developments because it limits their risk exposure. Under this structure, the builder agrees to complete the project for a set sum, and variations are documented separately. A cost plus contract, where you pay the builder's costs plus a margin, introduces uncertainty that makes lenders nervous. Some lenders will not finance cost plus arrangements at all, while others will apply higher interest rates or require larger deposits.
If you're planning to act as an owner builder, your finance options narrow considerably. Lenders view owner builder projects as higher risk, and many will not provide construction loans under this arrangement. Those that do typically require substantial construction experience and a higher equity contribution, often 30% or more.
How progressive drawdown schedules work in practice
The progress payment schedule dictates when funds are released during construction. Each stage is tied to a specific milestone, such as footings poured, frame erected, or windows and doors installed. Once your builder notifies you that a stage is complete, you arrange a progress inspection. The valuer or quantity surveyor attends the site, confirms the work meets the required standard, and issues a report to the lender. The lender then releases funds to cover that stage, minus a retention amount held back until practical completion.
Progressive Drawing Fees apply each time funds are released, typically between $300 and $500 per drawdown. Across a five-stage build, this adds $1,500 to $2,500 to your total costs. Some lenders cap the number of drawdowns or charge higher fees for additional releases, so understanding the fee structure before you commit becomes important.
Managing interest during the construction phase
During construction, you only pay interest on the amount drawn down, not the full loan amount. This is one of the key advantages of construction funding compared to a standard loan. If your land cost is funded and you've drawn down for the first two construction stages, you're paying interest on that portion only. As each new stage is completed and funds released, your interest cost increases accordingly.
Interest-only repayment options are standard during the construction phase, allowing you to manage cash flow without making principal repayments. Once construction reaches practical completion, the loan typically converts to principal and interest repayments, although some lenders offer an extended interest-only period if you're holding the units as rental investments rather than selling them immediately.
The role of valuation and end debt in your approval
Lenders assess two valuations when considering development finance: the 'as is' value of the vacant site, and the 'as if complete' value once the development is finished. The gap between these figures determines the viability of the project from a lending perspective. If the completed value does not provide sufficient margin over the total cost including land, construction, and fees, the lender may decline the application or reduce the loan amount.
End debt refers to the amount you'll owe once construction is complete. If you plan to sell the completed units, you need an exit strategy that repays the construction loan within a reasonable timeframe. If you're retaining them as investment properties, the rental income must service the debt, and the loan structure typically converts to a standard investment loan with principal and interest repayments.
What St Kilda West buyers should know before proceeding
St Kilda West's heritage overlay areas and proximity to Port Phillip Bay mean many sites come with planning restrictions that affect feasibility. A site near the foreshore may have height limits or design guidelines that reduce the number of units you can build compared to a similar-sized block further inland. Before committing to a purchase, obtain preliminary planning advice and confirm the site can support your intended development.
Accessing construction loan options from banks and lenders across Australia allows you to compare not just interest rates, but also their appetite for multi-unit projects in your area. Some lenders specialise in developments of three to six units, while others focus on larger projects or prefer house and land packages for single dwellings. Working with a mortgage broker in St Kilda West who understands local planning conditions and has relationships with development-focused lenders can reduce the time spent on applications that are unlikely to succeed.
Once construction begins, maintaining contact with your builder, certifier, and lender ensures progress inspections are scheduled promptly and drawdowns occur without delay. Builders often need to pay sub-contractors, plumbers, and electricians within agreed timeframes, and delays in drawdown approvals can create tension or slow the build. Keeping documentation organised and responding quickly to lender requests keeps the project moving.
Call one of our team or book an appointment at a time that works for you to discuss how construction funding can be structured for your St Kilda West development site.
Frequently Asked Questions
How much deposit do I need for a multi-unit development loan?
Lenders typically require between 20% and 30% of the total project cost including land, construction, and associated fees. Your equity contribution can include cash, existing property equity, or the unencumbered value of land you already own.
What happens if construction takes longer than expected?
Most construction loans include a fixed term for the building phase, usually 12 to 18 months. If the build extends beyond this, you may incur extension fees or need to renegotiate terms with the lender. Keeping buffer time in your project schedule helps manage this risk.
Can I use a construction loan if I'm acting as owner builder?
Some lenders will finance owner builder projects, but options are limited and typically require substantial construction experience and a higher deposit, often 30% or more. Many lenders will not provide finance for owner builder developments at all.
How are funds released during a multi-unit development?
Funds are released progressively based on a construction draw schedule tied to completion milestones. Each stage requires a progress inspection by a valuer or quantity surveyor who confirms work is complete before the lender releases the next payment.
Do I pay interest on the full loan amount during construction?
No, you only pay interest on the amount drawn down at each stage, not the full approved loan limit. This keeps interest costs lower during the construction phase and improves cash flow management.
