If you’re eyeing a residential development venture, understanding the intricacies of residential development loans is crucial. Here’s an in-depth guide to help you navigate the process: 

Borrowing Limits Based on Development Size: 

Small Developments (Up to 4 Dwellings) 

• For 2 dwellings: Borrow up to 95% of land and construction costs. 
• For 4 dwellings: Borrow up to 80% of land and construction costs. 
• Up to 100% of property market value and associated purchase costs with a guarantor. 

Medium Developments (5 or More Dwellings) 

• Borrow up to 70% of land and construction costs. 
• Private lenders may exceed 70%, but with higher interest rates. 
• Must meet 70% of Gross Realisation Value (GRV). 
• Minimum 20% profit margin required. 
• Loan term: Up to 3 years. 
• Minimum loan size: $1,000,000. 
• Maximum loan size: Case-by-case basis, considering amounts over $20 million. 

Residual Stock Loans: Designed to maximize return on investment. 

Residential vs. Commercial Loan: 

• Residential development loans cover up to 4 units for residential purposes (duplex, triplex, townhouse, or small unit block). 
• Projects exceeding 4 units fall under commercial development loans. 
• Lower interest rates for residential development loans. 

Personal Guarantee and Trust Structure: 

• Directors and significant shareholders typically provide guarantees. 
• Negotiable based on Loan to Value (LVR). 
• Setting up a trust or company may be required by some banks for unregulated residential development loans. 

Loan Release Stages: 

• Funds released at key development stages: deposit, base, frame, lock-up, and fixing stages. 
• Progress payments facilitated by submitting payment requests and builder invoices. 
• Delays in progress payments can be managed efficiently with a specialist mortgage broker. 

Assessment of Development Plans: 

• Lenders evaluate viability and profitability. 
• Business plan or feasibility plan required. 
• Components of a comprehensive business plan include available funds, contingency funds, developer experience, building team qualifications, site description, design concept, costs breakdown, construction timeline, and sales strategy. 

First-Time Developers: 

• Generally require previous development experience. 
• Exceptions for up to 70% of Gross Realisation Value (GRV) or 80% of hard costs. 
• Borrow up to $1,500,000 for up to four dwellings. 
• Some lenders may not need proof of income for resale-based developments. 
• No presales required for small developments. 

Feasibility Study: 

• Essential for accurately calculating construction costs, profits, and potential challenges. 
• Includes Development Application (DA) costs, construction costs, selling expenses, and unpredictable overruns. 
• Aim for a 20-30% profit margin. 

Rental Income and Bank Assessment: 

• Proposed rental income accepted. 
• Verification through real estate agent letters or bank valuer estimates. 
• Banks assess the borrower’s financial position, experience, and character. 
• Clear credit file preferred, but some lenders consider applications with bad credit if the financial position is strong. 
• Security options: cash or equity in an existing residential property. 

Presales Requirement: 

• Unlike commercial development loans, presales not mandatory. 
• Exceptions may apply for rural or higher-risk locations. 
• Presales strengthen the loan application. 

Soft Costs and Multiple Loans: 

• Soft costs (DA, clearing, legal fees) may require separate loans. 
• Equity release from existing property or formal written quotes may extend the loan. 
• Strategic planning needed for land, construction, and investment loans. 

Switching to a Residential Loan: 

• Refinancing to a residential loan possible after project completion and obtaining an Occupation Certificate. 
• Requires at least 12 months of development loan payments. 
• Suitable for developers meeting 100% debt cover requirements. 

Residential Development Loan FAQs: 

• A business-oriented approach to residential development is crucial. 
• Team includes a reputable builder, solicitor, accountant, architect, surveyor, town planner, engineer, and real estate agent. 
• Focus on the opportunity cost of tied-up funds. 
• Hold a strategic exit plan, considering whether to sell or keep properties as investments. 

Conclusion: A residential development venture demands meticulous planning, financial acumen, and a well-structured loan arrangement. Engaging with experienced mortgage brokers can streamline the process, providing tailored solutions for a successful residential development project.