Development finance vs a construction loan: built to keep, or built to sell?

Ask one question before you compare a single term sheet: when the building is finished, will you keep it or sell it? If you’ll keep it, you’re almost certainly looking at a construction loan. If the sale of what you build is what pays the lender back, you’re in development finance territory. The two products overlap at the edges, but that single question decides how the lender sizes the loan, releases the money and judges the risk.

Head-to-head summary

	Construction loan	Development finance
Typical project	Your own premises, a house, a single build or small renovation	Townhouses, apartments, industrial units, subdivisions built to sell
Borrower	Owner-occupier or investor holding the finished building	Developer, often a special-purpose company or trust
How it’s sized	Value on completion and your ability to repay	Total development cost and end value (gross realisation)
Equity in first	Deposit or land equity	A meaningful share of total cost, before the lender’s first draw
Pre-sales	Not needed	Often required, especially by banks
Releasing money	Progress payments against builder’s contract stages	Draws against a quantity surveyor’s cost-to-complete reports
Interest during the build	Usually paid monthly on the amount drawn	Usually capitalised and repaid from sales
Exit	Your income, or a standard loan at completion	Settlement of the sold units, or a residual stock loan
Who lends	Banks and non-banks	Banks, non-banks, private credit funds, plus mezzanine lenders

How does money flow in a construction loan?

You sign a building contract, the lender approves a limit based on the land and the finished value, and the builder is paid in stages as the work progresses. For residential work, state rules shape that schedule. In New South Wales, the government’s guidance says the maximum deposit a builder can ask for is 10%, contracts over $20,000 must include a progress payment schedule, and the builder needs home building compensation cover for jobs over that amount. Victoria’s consumer regulator publishes a standard schedule for a full build: base 10%, frame 15%, lock-up 35% and fixing 25% of the price, after the deposit.

Commercial builds, like a new workshop or a medical suite, aren’t bound by those residential rules but tend to follow similar stage-based claims. Each progress draw is usually checked by the lender’s valuer before money moves. You pay interest on the drawn balance alone, normally monthly from income.

How does money flow in development finance?

Here the lender thinks like a co-investor checking a feasibility study. It looks at land cost, construction cost, consultants, council contributions, marketing, selling costs, GST and finance costs, adds them into a total development cost, and compares that with what the finished stock should sell for. The facility is capped by whichever measure gives the lower figure: a loan-to-cost ratio or a percentage of end value.

The developer’s equity goes in first. After that, an independent quantity surveyor reports monthly on work done and the cost to complete, and the lender funds each draw only if the remaining facility still covers the rest of the job. Interest is usually capitalised, because a project with no units sold has no income to pay it. Many banks want pre-sales covering a large part of the debt before the first draw. Non-bank and private funders will often accept fewer pre-sales, in exchange for higher costs and tighter oversight.

That flexibility is why private credit plays such a large role. ASIC’s September 2025 report on the private credit market described it as concentrated in higher-risk real estate construction and development lending. For borrowers, that means plenty of choice outside the banks, and good reason to read the fee schedule, extension terms and default provisions very carefully.

Already have a project in mind? Tell us about it in a minute; asking won’t touch your credit score.

When does a construction loan win?

• You’ll occupy or hold the building. Your own warehouse, clinic or workshop, or a property you’ll lease out long term.
• Your income can carry the interest. Monthly interest during the build is affordable from the business or other income.
• There’s a fixed-price builder’s contract. Lenders are more comfortable when a licensed builder carries the construction risk.
• The project is a single, straightforward build. No sales risk, no feasibility study, less monitoring cost.
• You want to refinance into a long-term loan at completion. The completed building becomes the security for an ordinary commercial property loan.

When does development finance win?

• The project is built to sell. The sales are the repayment, so the facility has to be designed around them.
• The numbers come from the project, not your payslip. Income-based servicing wouldn’t stretch to a multi-unit build.
• You need interest capitalised. It keeps the project cash-neutral until settlements arrive.
• There’s a capital stack. Senior debt plus mezzanine finance or a joint venture partner can reduce the equity you put in.
• You’re building more than one or two dwellings, or commercial units for sale, where construction lenders’ policies run out.

Example: same block, two strategies

Illustrative only. An owner of an electrical contracting business holds an industrial block worth $900k with no debt. Building costs for four small warehouse units are quoted at $2.4m.

• Keep strategy: the business moves into one unit and leases the other three. A construction loan funds the build against the completed value and the lease income, with monthly interest paid from the business. At completion it rolls into a long-term commercial loan.
• Sell strategy: all four units are marketed off the plan. A development lender assesses the full cost, including selling costs and interest, against forecast sales, wants two units pre-sold, and capitalises interest. Settlements on completion repay the facility; any unsold unit moves to a residual stock loan.

Same land, same builder, two quite different loans.

Decision checklist

1. On completion, are you keeping the building or selling it?
2. Can income cover interest during the build, or must it be capitalised?
3. Is there a fixed-price contract with a licensed builder?
4. How much equity can go in before the lender’s first draw?
5. How many pre-sales can you realistically secure, and when?
6. What happens if the build runs late or sales slow? Check extension fees and the residual stock option.
7. Who else might help fund the gap? The guide to how property developers fund the gap covers deposits, mezzanine and partners.

Building something? Let’s look at the funding gaps

Projects seldom fail on the main loan alone. They stall on a land deposit, a cost blowout mid-build, an equity shortfall before the first draw, or unsold stock at the end. Property-secured funding from $20k to $5m can cover those gaps, and that’s where our team can help. The enquiry needs about sixty seconds and has no effect on your credit file. We don’t distribute it to a roster of lenders. Someone experienced in property lending reviews your project and calls you to discuss it. Give us accurate figures on land value, costs and what’s owing, so the first suggestion is one that genuinely suits the project.

Talk to us about your project funding →