Case study: Small scale development finance (5 or less dwellings)

Marty McDonald - Tuesday, July 12, 2016

When it comes to finance for small scale development or unit blocks on one title most lenders will deem it a commercial transaction if there are more than 2 or 3 dwellings involved. This is regardless of whether the property will be subdivided, strata titled or whether they will remain on the same title.

Recently an investor came to me who had a block of land that had one property already built on it and had plans approved to build three more properties. This investor would be subdividing the land into separate titles in due course. Most lenders in this situation would want this to be assessed as a commercial transaction rather than a residential one. This has huge implications for fee’s, interest rate and the deposits / equity required i.e. the maximum LVR allowed as I will outline below.

Commercial development loans rates are on average at least 1.50-2.00% pa higher than standard residential rates. They also have significantly higher fees, typically from 0.50% - 1.00% of the loan amount. For a $1 million loan that’s a potential $10,000 fee. These loans also have a usual maximum LVR of 65% which can be limiting especially as valuations are often conservative.

Comparison: $1,000,000 construction loan over 12 months


Residential loan

Commercial loan

Interest rate



Application fee


Minimum $5,000

Valuation fees



Quantity Surveyor / other fees



Minimum equity required



Total costs over 1 year







With our advice and help in finding the right lender this borrower was able to get his loan on residential loan terms. He will save thousands of dollars.


About the Author: Marty McDonald is principal of mortgage broker “Mortgage Experts”. Marty specialises in assisting active property investors with loan structuring advice and implementation as well as helping credit worthy borrowers with slightly outside the box income and employment situations. Find Marty on  and LinkedIn.
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