The difference between a construction loan and development finance
Over the past year we have fielded a steady run of enquiries from investors who have built up solid equity and want to deploy capital somewhere other than a single rental property. Small scale residential development, typically three to six townhouses on an infill site, keeps coming up.
It is also quite a different sport to buying an investment property, and the finance behaves nothing like a standard construction loan. On top of that, the 2026 Federal Budget has changed the tax arithmetic in a way that makes new builds considerably more attractive than established stock for anyone buying from here.
Here is what happens when you move past three dwellings.
The threshold that shifts the file
There is no single statutory line that says “four dwellings equals commercial”. What happens in practice is that most lenders’ residential construction policy runs out somewhere around two or three dwellings on a single title. Past that point, the application stops being assessed against your income and starts being assessed against the project.
There is a mental shift that first-time developers need to think through. A home loan asks whether you can service the debt whereas development finance asks whether the project can repay itself, on time, out of its own sale proceeds or a refinance. Your income matters, but mainly as a fallback and as evidence you can cover a cost overrun, if needed.
How the deal gets sized
Development lenders work off three numbers, and it pays to know them before you speak to anyone:
- GRV (gross realisation value): the total expected sale value of the completed dwellings, usually assessed net of GST.
- TDC (total development cost): land, construction, professional fees, council contributions, finance costs, holding costs and contingency.
- LVR and LCR: the loan expressed against GRV, and against total cost.
Facilities are almost always sized against both, with the lesser figure governing. Indicative market commentary as at mid 2026 suggests major banks typically cap at roughly 60 to 65 per cent of GRV or 75 to 80 per cent of TDC, whichever is lower, while non-bank and private senior lenders commonly go to 65 to 75 per cent of GRV and will often stretch TDC further. Adding mezzanine debt or preferred equity can lift total funding higher again, at a materially higher blended cost.
In equity terms, that puts most first projects somewhere in the range of 20 to 35 per cent of total development cost out of your own pocket, and lenders generally want to see that equity go in first. Land you already own, or equity in it, frequently does that job.
Other structural features worth understanding:
- Progressive drawdowns. Funds are released in stages against a quantity surveyor’s certification of works completed, not on request.
- Capitalised interest. Interest is usually rolled into the facility rather than paid monthly, which means it must be budgeted for inside the feasibility.
- Short terms. Facilities typically run 18 to 36 months. This is bridging capital, not a 30-year loan.
- Cost. Bank pricing has recently sat around 7 to 9 per cent all in, plus an establishment fee of roughly 1 to 1.5 per cent of the facility limit. Private funding sits above that.
Presales
Presales are the requirement that surprises people most. Banks have generally wanted qualifying presale contracts covering a meaningful share of the debt, and through mid 2026 that has commonly been in the range of 50 to 70 per cent of debt cover, with lower thresholds occasionally available for affordable product in genuinely undersupplied locations. Private and non-bank lenders will often fund with limited or no presale requirement, but they price for it and they underwrite the exit far more aggressively as a result.
For a four to six dwelling project, presales are frequently the difference between bank pricing and private pricing. That gap is worth modelling properly, because on a small project the extra interest cost can consume a large slice of the margin.
What improves as the numbers grow
Most of what changes past three dwellings is friction. Two things genuinely move in your favour, though, and both are worth building into the feasibility early.
The first is optionality at the end. At four or more dwellings you can run a partial sell down. Sell two to clear the development facility, retain two, and refinance the retained stock onto a residual stock or investment facility. The dwellings you keep are new builds in your hands, so they retain the negative gearing treatment and the choice at sale between the 50 per cent CGT discount and the indexation method. They are also substantially deleveraged, because the sold stock has already repaid the expensive debt. That structure is not available on a single build and it is tight on a duplex.
The catch is that it has to be underwritten from the start, not improvised at completion. The takeout facility, the serviceability on the retained dwellings and the on-completion valuations all need to be part of the original credit submission. Lenders are considerably less accommodating when a change of exit strategy arrives with three months left on the term. A mixed sell and hold approach also has GST consequences, since retained dwellings are rented on an input taxed basis, so map that with your accountant before construction starts rather than at settlement.
The second is simple cost spreading. Development approval, siteworks, service connections, headworks and developer contributions, professional fees and the quantity surveyor do not scale in step with dwelling count. Per dwelling, those costs fall as the project grows, which is a large part of why margins on four to six dwellings often look healthier than on two.
One thing this section is not saying: the tax treatment comes from building something new, not from building four of them. Treasury’s test is a net increase in dwellings, so a duplex replacing a single house qualifies just as a row of townhouses does. The dwelling count changes the finance and the economics, not the eligibility.
What the lender wants to see
The file for a small development is a genuine document pack, not a two-page application:
- A development feasibility showing costs, expected values, margin and sensitivity to movements in both.
- Development approval, and ideally construction certificate documentation.
- A fixed price contract with a licensed builder, plus that builder’s financials, insurances and current workload.
- Quantity surveyor cost report.
- Independent valuation on both an as-is and an on-completion basis.
- A written exit strategy, being sale, refinance to a residual stock or investment facility, or a combination.
- Your own track record.
That last one is the sticking point for professionals. First time developers are not excluded, but they are priced and structured more conservatively. The usual ways to bridge the gap are to engage an experienced project manager or development manager, to partner with someone who has delivered similar projects, or to keep the first project deliberately small so the track record exists for the second one.
If you are self-employed, income verification is not the obstacle it is on a standard low doc home loan, because the assessment is project led. That said, expect to provide considerably more financial information than you would for a residential application, not less.
The tax layer, which has just changed
This is the part of the conversation that has shifted most recently. We raise it here because it is not a side issue for a broker. Whether a project is built to sell or built to hold changes total development cost, changes how GRV is assessed, and changes the exit the credit team underwrites. The facility cannot be sized properly without it. What follows is background on how the rules work, not advice on how they apply to you.
The 2026 Federal Budget reforms to negative gearing and capital gains tax are now law. From 1 July 2027, negative gearing for residential property is limited to new builds. Losses on established residential properties acquired after 7:30pm AEST on 12 May 2026 will be quarantined, meaning they can only be offset against residential property income or gains, with excess losses carried forward. Properties held at the time of the announcement are grandfathered.
New builds are carved out. If you build and hold, you keep the ability to offset a rental loss against your salary or practice income, and you also get a choice at sale between the 50 per cent CGT discount and the new indexation plus minimum tax method.
What qualifies matters enormously here. Treasury has defined a new build as residential property that genuinely adds to supply. That includes any residential construction on previously vacant land, and it includes demolishing an existing property and replacing it with a greater number of dwellings. A one for one knock down rebuild does not qualify and neither does a substantial renovation.
Knocking over one tired house and putting up four townhouses sits squarely inside the definition, while buying an established rental from here does not. Whether that difference is material to you is a question for your accountant, but it is a difference worth knowing about before you choose between the two.
Two further points are easy to miss:
- The status is one shot. A new build cannot have been previously sold, unless it was first owned by the builder and not occupied for more than 12 months. Subsequent purchasers get neither negative gearing nor the 50 per cent CGT discount on that dwelling. Practically, this means finished new stock now carries a tax premium for the first investor purchaser, which is worth understanding when you price presales. It also means timing matters. Rent a completed dwelling out for 18 months and then sell it, and your buyer loses the concession.
- Depreciation compounds the effect. New builds attract capital works deductions under Division 43 at 2.5 per cent of construction cost per year for 40 years, plus full plant and equipment deductions under Division 40 on the new fixtures and fittings. Investors in second-hand residential property have been locked out of that Division 40 claim since 9 May 2017. On a newly built townhouse this is often several thousand dollars a year in additional deductions, and it is a large part of why new stock runs a better after-tax cash flow position than established.
Three questions to put to your accountant early
Are you building to sell, or building to hold? The two are taxed quite differently, and the new build negative gearing concession is directed at investors who hold and rent rather than at profit making sales. The answer shapes your after-tax position more than almost any other decision in the project.
How will GST apply? Selling new residential premises is a taxable supply, while renting is input taxed, and the two treatments recover the GST on construction very differently. On a project of this size the gap is measured in tens of thousands, so it belongs in the feasibility from the outset rather than being discovered at settlement.
Which holding costs are deductible, and in which entity? Deductions for the costs of holding land while it is under construction are restricted, and the outcome varies depending on the entity that holds the site. That makes it a question to resolve before the land is bought.
We raise these because each one moves the numbers a lender will assess. Working out how they apply to your circumstances is a job for a registered tax agent, and it is worth doing before the site goes unconditional rather than at the first BAS.
The risk nobody puts in the feasibility
Builder failure. ASIC’s insolvency statistics for 2025-26 recorded 14,152 companies entering external administration for the first time, with construction the largest single industry at roughly 3,450 to 3,500 companies. That figure was down slightly on the prior year, which is the first annual improvement in several years, but it remains around a quarter of all corporate failures.
A fixed price contract with a builder who fails halfway through is not a fixed price. Check the builder’s financial position, not just their licence. Check how many jobs they are running. Build a real contingency, and make sure your feasibility still shows a margin if construction runs three months long and sale values come in 5 per cent under valuation.
Where to start
If you are considering a first development, the useful order of operations is: model the feasibility, get a preliminary view on funding capacity, then commit to the site. Too many enquiries reach us with the land already bought and the numbers assessed afterwards.
We are happy to run through indicative structure, likely equity requirement and whether a project is a bank deal or a private deal before you go unconditional. That conversation costs nothing and it occasionally saves a great deal.
This article is general information only and does not take into account your objectives, financial situation or needs. AP Finance is not a registered tax agent and nothing here is tax advice. The commentary on negative gearing, capital gains tax, GST and holding costs is a general description of publicly available rules, provided because those rules affect how a development facility is structured and assessed. Outcomes depend on your circumstances, your intention and your structure. Obtain advice from a registered tax agent before acting, and speak with a licensed finance professional about the funding.
Sources
- Australian Taxation Office, Tax reform, Boosting home ownership, Reforming negative gearing and capital gains tax, updated 29 June 2026: www.ato.gov.au/about-ato/new-legislation/in-detail/individuals/tax-reform-boosting-home-ownership-reforming-negative-gearing-and-capital-gains-tax
- Australian Government, Budget 2026-27, Negative Gearing and Capital Gains Tax Reform tax explainer, which includes the eligible new build comparison table: budget.gov.au/content/factsheets/download/tax-explainers-negative-gearing-capital-gains-tax.pdf
- Treasury Laws Amendment (Tax Reform No. 1) Act 2026, passed the Senate 25 June 2026
- Income Tax Assessment Act 1997, section 26-102, and ATO Taxation Ruling TR 2023/3, Income tax: expenses associated with holding vacant land
- Treasury Laws Amendment (Housing Tax Integrity) Act 2017, Division 40-27, being the restriction on second-hand residential plant and equipment
- ATO, GST at settlement: www.ato.gov.au/businesses-and-organisations/gst-excise-and-indirect-taxes/gst/in-detail/your-industry/property/gst-at-settlement
- ASIC insolvency statistics, Series 1, released 13 July 2026, reported by Accountants Daily and analysed by The Good Builder
- Indicative LVR, LCR, presale and pricing ranges drawn from Australian development finance market commentary published in 2026 by Stac Capital, Billbergia Group, Innovate Funding and Everglow. These are market observations rather than lender commitments and vary by project, location and sponsor.
Written by Troy Schirmer, National Finance Manager – AP Group
AP Group are the leading pharmacy experts in Australia and specialise in helping first time buyers find the right pharmacy and secure the finance to support their purchase.
We connect existing owners with over 5000 ready and eager investors via our cutting-edge online Data Room. Our Data Room keeps confidential listing data secure and allows buyers to make informed decisions on each of our pharmacies for sale.
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About the Author:
Troy brings more than a decade of experience in banking and lending, having spent 11.5 years with NAB, including eight years as a Banker within NAB Health. He has supported clients across Victoria and nationally, helping finance the purchase of a wide range of businesses, from pharmacies and medical clinics to childcare centres and other commercial assets.
Highly experienced across business lending, home lending, and asset finance, Troy holds a Bachelor of Commerce with majors in Accounting and Finance, along with a Diploma of Financial Planning. He is known for his practical approach and ability to navigate complex lending structures with clarity and confidence.
Outside of work, Troy enjoys spending time with his family, travelling, watching just about any sport, and is a proud Essendon tragic – regardless of the score.