If you are buying land in Kenmore to build townhouses, the loan you need depends on the project. A single dwelling or a small owner-occupied or investment build may suit a residential construction loan, which covers the land purchase first and then releases money to your builder in stages. Multiple townhouses, particularly ones built to sell, may need development finance with different deposit, pre-sale, GST and approval requirements. Confirm this with a broker before you buy the land.
That structure shapes your repayments, your timing and the paperwork a lender wants to see. This article walks through it in the order you will meet it.
How Does a Construction Loan Work When You Buy the Land First?
A construction loan lends against both the land and the build. Money is released in stages as work is completed, not as one lump sum at the start.
The land is typically paid for at settlement, and the building funds follow as your builder reaches agreed stages. Because the funds come out gradually, many lenders only charge interest on the amount drawn down. Your early repayments are therefore lower than they would be on a loan fully paid out on day one. Lenders differ on how they set this up, so compare the terms before you commit. Our construction loans page explains the main structures.
The trade-off is that interest builds as each stage is paid. A delayed build means a longer period of repayments before you have a finished townhouse to rent or sell.
What Does a Lender Want to See Before Approving Townhouse Construction?
Lenders generally want the build to be well documented before they approve a construction loan application. That means plans, a costed building contract and evidence the project can go ahead.
For a townhouse project, that usually includes a fixed price building contract with a registered builder. It also includes council plans and proof that the site has the right approvals. Check with Brisbane City Council what development application and council approval your site needs. This can take time, and your finance timeline should allow for it.
Your borrowing capacity matters here too. The lender will assess the total loan amount for land and build together, not just the land. If you are building to sell rather than live in, tell your broker early. Building to sell can change which loan products are available, along with their deposit and approval requirements. You should also check the tax treatment of a sale, including GST and income tax, with an accountant.
Construction Draw Schedule: How Progress Payments Are Released
A construction draw schedule sets out the build stages and the portion of the loan paid at each one. Your builder claims a progress payment, the lender arranges a progress inspection, and the funds are released once the stage is confirmed complete.
Consider a buyer who has settled on a Kenmore block and signed a contract with a registered builder. As an illustration, the total facility is $800,000 with an example rate of 6.75% p.a. If the loan were fully drawn, interest alone would be about $54,000 a year, or $4,500 a month. After the slab and frame stages, suppose $300,000 has been drawn. Interest on that balance is about $20,250 a year, or roughly $1,687 a month.
By planning around the drawn amount, this buyer budgets for a payment that rises at each stage rather than a flat $4,500 from the start. The outcome is a repayment plan that matches the build, with a buffer set aside for the later stages when the balance climbs. The figures are illustrative only. Your lender sets the actual rate and fees.
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What Are the Costs and Risks of Construction Finance?
The main costs are higher interest as the balance grows, possible progressive drawing fees, and extra payments if the build runs over budget. Fees and rules differ between lenders.
A few risks are worth planning for:
- Delays can extend the interest-only period and push back when the townhouse can earn income or be sold.
- Variations to the plans can add cost that the loan does not cover.
- A lender will want a valuation or progress inspection at stages, and a result below your expectation can affect the next payment.
Some lenders allow a switch from construction to permanent loan after the build is complete, often moving you to principal and interest repayments. That change lifts your repayment, so budget for it before the build starts. Use a repayment calculator to test your numbers, and ask your broker to explain each lender's fees.
Why Builder Choice Affects Your Loan
A lender will only pay a builder it is comfortable with, so your builder and contract choice can decide whether your loan is approved. A registered builder with a clear fixed price contract is easier for a lender to assess.
Lenders often prefer fixed price contracts because the total cost is known. A cost plus contract can leave the final price open, which makes it harder to set the loan amount. Whichever you choose, your builder needs to pay sub-contractors such as plumbers and electricians from the money you release, so keep your inspections and payments on schedule. Delays in payments can slow the site.
If you want local advice on the whole process, our Kenmore mortgage broker page shows how we help buyers in 4069. If you are comparing a build with buying an existing property, our home loans page covers that option.
Call one of our team or book an appointment at a time that works for you, and we will work through your land purchase, build costs and loan options together.
Frequently Asked Questions
How does a construction loan differ from a standard home loan?
A construction loan releases money in stages as your builder completes work, rather than all at once. Many lenders only charge interest on the amount drawn down, so repayments usually rise as the build progresses.
Do I need council approval before applying for construction finance?
Lenders generally want to see plans and evidence of the approvals your site needs before they approve a loan. Check with Brisbane City Council which development application and council approval apply to your townhouse project.
What is a construction draw schedule?
It is the list of build stages and the portion of the loan paid at each one. Your builder claims a progress payment and the lender usually arranges an inspection before funds are released.
Why do lenders prefer fixed price building contracts?
A fixed price contract sets the total build cost up front, which makes the loan amount easier to assess. A cost plus contract can leave the final price open, which lenders may find harder to approve.
