Development finance vs Construction loan
Development finance vs construction loan in Australia: which stage each funds, LVC and LVR caps, pre-sale requirements, QS monitoring, and how the two products work together on a typical project.
A construction loan funds the physical build of an approved project, drawing in staged tranches against quantity-surveyor-certified progress claims. Development finance is broader, covering land acquisition, DA-hold and the lead-in to construction, with covenants tied to DA milestones and pre-sale conditions rather than build progress alone. Most projects use both in sequence: development finance for the site and DA stage, then refinance to a construction loan once the DA is granted and pre-sales are in place.
Side-by-side
| Attribute | Development finance | Construction loan |
|---|---|---|
| Stages funded | Land acquisition, DA hold, construction, residual stock | Construction only (post-DA, post-pre-sale) |
| Pre-DA availability | Yes, development finance funds site acquisition before DA is granted | No, DA approval required before drawdown |
| Pre-sale requirement | Varies; private lenders may fund below 100% pre-sale coverage | Major banks typically require 100%+ debt coverage in pre-sales |
| Primary LVR metric | LVC (loan-to-cost) and LDV (loan-to-development value) | LTC (loan-to-cost): typically capped at 65-80% of total project cost |
| Drawdown structure | Flexible: land advance at settlement plus milestone drawdowns | Progress drawdowns against QS-certified build stages |
| QS monitoring | Required on construction component; optional on land-hold stage | Mandatory throughout the build |
| Typical lender | Private credit lender or specialist development fund | Major bank, tier-two non-bank, or private lender |
| Senior debt pricing (2026) | From 8.99% p.a. (varies by stage, LVR, sponsor) | From 6.5% p.a. (varies by lender type) |
| Typical term | 6-24 months per stage, extendable to DA or presale milestone | 12-24 months, tied to practical completion |
| Interest treatment | Capitalised or serviced, depending on stage and cashflow | Typically capitalised into the facility balance |
- Pre-DA land acquisition where the approval outcome is still pending
- Short option period or auction settlements where the major-bank timeline will not fit
- Projects where pre-sales are below the major-bank threshold but the development case is strong
- Experienced developers building a land bank ahead of a medium-term build programme
- Bridge from land settlement to a construction loan once DA and pre-sales are secured
- Post-DA project with pre-sales in place and a fixed-price build contract signed
- Major-bank eligible project: established developer, metro location, conventional product, 100%+ pre-sale coverage
- Borrower seeking the lowest available rate on the construction stage specifically
- Projects where QS monitoring and staged progress-claim drawdowns align with the build programme
In practice
Development finance and construction loans are often described as interchangeable, but they fund different stages of a project and are structured around different credit risks. Understanding the distinction helps developers and brokers select the right capital for each phase.
A construction loan is stage-specific. It funds the physical build of a project once the development approval has been granted, a fixed-price build contract is signed, and (in most major-bank cases) a minimum pre-sale coverage threshold is met. The facility draws in tranches against a quantity surveyor's certified progress claims: slab pour, framing, lock-up, fixing, practical completion. The loan is sized against the contracted construction cost and repaid from the sale of completed lots or units, or refinanced to a stabilised investment facility.
Development finance covers the full project lifecycle before and through construction. A private development finance facility can fund the initial land acquisition at DA-stage pricing, the hold period while the DA approval is processed (sometimes 6-18 months), value-add work needed to reach a bankable construction specification, and then the construction itself. The structure and covenants adjust to the project's stage: land-hold LVRs and pre-sale conditions change as the DA progresses.
The two products are typically used in sequence rather than as alternatives. A developer acquires a site on development finance, holds it through the DA process, achieves the pre-sale threshold, then refinances from development finance to a construction loan for the build. Each transition is a credit decision in its own right. The construction lender underwrites the completed project value, the build programme, and the pre-sale coverage, not the land acquisition story.
The distinction matters for brokers at the point of submission. A client with a site under contract but no DA is a development finance client. A construction lender cannot fund pre-DA acquisition because there is no approved building to construct. The correct conversation is with a private lender or specialist development funder who can write the land-hold stage with structured milestones for the construction loan takeout.
Pricing reflects risk. Development finance (particularly at the land and DA stage) prices above construction loans because the risk is higher: there is no approved building yet, no pre-sales, and the exit depends on a planning process outside the borrower's control. Construction loans price lower because the project is approved, the build contract fixes cost, and the exit (sales or refinance) is modelled off a completed asset. Experienced developers account for this in their funding cost modelling from the outset.
Frequently asked
- Can I get development finance without a DA?Yes. Private development lenders write land acquisition before a DA is granted, sized against the land value with a covenant tied to the DA milestone. Major banks and most tier-two non-banks will not fund pre-DA acquisition because there is no approved project to underwrite. Once the DA is granted and pre-sales are underway, the file can refinance to a construction loan on lower-cost senior terms.
- How many pre-sales do I need for a construction loan?Major Australian banks typically require pre-sale coverage of 100% or more of the debt amount (not total project cost), meaning all units must be pre-sold before the construction loan draws down. Tier-two non-banks may accept 60-80% coverage. Private construction lenders can write lower pre-sale thresholds but at a wider rate, reflecting the additional risk of unsold stock at completion. The exact threshold depends on project type, location, sponsor track record, and the lender's current book.
- What does a quantity surveyor do on a construction loan?A quantity surveyor (QS) independently certifies that construction has reached the claimed stage before the lender releases the next progress drawdown. The QS monitors cost-to-complete throughout the project, flags scope changes or cost overruns, and signs off at practical completion. QS certification protects the lender from funding build stages that have not actually been completed. On development finance at the land-hold stage, QS monitoring is typically not required; it becomes mandatory when construction commences.
- What is LVC and how does it differ from LVR?LVC (loan-to-cost) expresses the loan as a percentage of total project cost: land plus construction plus soft costs such as planning fees, consultant costs, and the interest reserve. LVR or LDV (loan-to-development value) expresses the loan as a percentage of the completed project's forecast market value. Development lenders apply both caps. A project with high build cost relative to end value may breach the LDV cap even with a low LTC. Both numbers need to work before the file is approved.