Top tips to finance land for apartment construction

Buying land for apartment construction is not the same as financing a house and land package

Purchasing land to build apartments involves a different structure to standard residential construction finance. Most lenders treat multi-unit projects as commercial or specialist residential construction, which means different deposit requirements, different approval criteria, and often different interest rates compared to a single dwelling build.

The loan structure typically separates the land purchase from the construction phase. You settle the land first, then draw down construction funds progressively as the build advances. Unlike a house and land package where the builder often coordinates timing, apartment construction requires you to manage council approvals, registered builder contracts, and a detailed progress payment schedule before any construction funding is released.

When lenders classify your project as commercial rather than residential

Most lenders draw the line at three or more separate dwellings. If you're building two townhouses or duplexes, some lenders will still treat this as residential construction finance. Once you move to three or more apartments, the majority of mainstream lenders shift the application into their commercial lending division, which changes the assessment process.

Commercial construction loans assess your project's feasibility, not just your personal income. The lender will want to see your development application approval, a fixed price building contract from a registered builder, and often a quantity surveyor's report. They'll also look at comparable sales in the area to confirm the end value supports the loan amount. Your deposit requirement usually sits between 20% and 30% of the total project cost, including land and construction.

Consider a buyer purchasing a block in Doncaster to build four two-bedroom apartments. The land costs $850,000 and the construction contract totals $1,400,000, bringing the full project to $2,250,000. With a 25% deposit requirement, that buyer needs $562,500 upfront, plus another $50,000 to $80,000 for settlement costs, council fees, and loan establishment. The lender releases construction funds according to a progressive drawdown schedule tied to building milestones, charging interest only on the amount drawn down during the construction phase. Once completed, the loan converts to a standard commercial or investment loan structure depending on whether the buyer plans to sell or hold the apartments.

What a progress payment schedule looks like for multi-unit builds

A progress payment schedule breaks construction into stages, with funds released after each stage is inspected and approved. The schedule is written into your fixed price building contract and matched to your construction loan. Typical stages include base stage (footings and slab), frame stage, lock-up stage (roof and external walls), fixing stage (internal fit-out including plumbing and electrical rough-in), and completion.

Each stage triggers a payment to the builder, but the lender only releases funds after a progress inspection confirms the work is complete. This protects both you and the lender from paying for work that hasn't been done. The builder usually requests payment at the end of each stage, and the lender arranges an inspection within a few days. Once approved, funds are transferred directly to the builder. Most lenders charge a progressive drawing fee for each drawdown, typically between $300 and $500 per inspection.

If your builder uses sub-contractors for specific trades like plumbers or electricians, payments are still made to the head builder under the fixed price contract. You're not responsible for paying sub-contractors separately unless you're acting as an owner builder, which most lenders won't finance for multi-unit projects due to the higher risk.

Why council approval timing affects your construction loan application

Lenders require an approved development application before they'll formally approve construction funding. If you're still at the planning stage when you want to purchase the land, you'll need to settle the land using a standard land loan, then apply for construction finance once council plans are approved.

This creates a timing challenge. Council approval in Melbourne can take anywhere from three to nine months depending on the council, the complexity of your design, and whether objections are lodged. During that period, you're paying interest on the land loan without any construction progress. Some lenders will offer a combined approval where they assess both the land purchase and the construction funding upfront, but they'll only release construction funds once you provide the council approval and building contract.

In our experience, buyers who start the development application process before purchasing land have more options. If you already hold council approval, you can move straight into a full construction loan application at settlement, which reduces the period where you're only paying interest on land without building.

How interest charges work during the construction phase

During construction, you only pay interest on the amount drawn down, not the full loan amount. If your total facility is $2,250,000 but only $850,000 has been drawn for the land purchase, your interest is calculated on $850,000 until the first construction drawdown. As each stage is completed and funds are released, your interest charges increase.

Most lenders offer interest-only repayment options during construction, which keeps your monthly outgoings lower while the project is underway. Once construction is complete and the loan converts to a standard facility, you'll usually move to principal and interest repayments unless you're holding the apartments as investments and choose to remain on interest-only.

Construction loan interest rates sit higher than standard home loan rates, typically between 0.3% and 0.8% above the lender's variable home loan rate. Specialist construction lenders may charge more again, particularly if your project involves four or more units. The rate you're offered depends on your deposit size, your experience with property development, and whether you're building to sell or hold.

Deposit requirements and where the funds need to come from

Lenders expect your deposit to be genuine savings or equity from another property, not gifted funds or borrowed money. For a multi-unit construction project, this usually means at least 20% to 30% in cash or usable equity, plus another 3% to 5% for costs. If you're using equity from an existing property, the lender will assess your borrowing capacity across both loans, factoring in rental income if the existing property is tenanted.

If your deposit comes from selling another property, you'll need to time the sale to settle before or at the same time as your land purchase. Some buyers use a bridging loan to cover the gap if they need to buy land before their current property sells, but bridging finance adds cost and requires you to service both loans during the overlap period.

Registered builder requirements and fixed price contracts

Lenders will only release construction funds to a registered builder working under a fixed price building contract. This protects you from cost blowouts and gives the lender certainty that the project will be completed within budget. The contract must specify each stage of the progress payment schedule and include start and completion dates.

Most lenders also require the builder to hold appropriate insurance and provide evidence of their registration. In Victoria, that means the builder must be registered with the Victorian Building Authority and hold domestic building insurance for projects over a certain value. The lender will verify this before approving your construction loan application.

Cost plus contracts, where you pay the builder's costs plus a margin, are generally not acceptable to mainstream lenders for construction finance. If your builder proposes a cost plus arrangement, you'll need to negotiate a fixed price contract or look for a specialist lender willing to assess the project differently.

Converting from construction to a standard loan once the build is complete

Once construction is finished and you receive your occupancy certificate, your loan converts from a construction facility to either a commercial loan or an investment loan depending on your plans for the apartments. If you're selling the units, the lender will expect repayment from sale proceeds. If you're holding them as rentals, the loan converts to a standard term with principal and interest repayments.

The conversion happens automatically in most cases, but the lender will revalue the completed property to confirm it supports the loan amount. If the valuation comes in lower than expected, you may need to reduce the loan balance or provide additional funds. This is uncommon if your initial feasibility was realistic, but it's another reason to ensure your purchase price and construction budget are conservative relative to end values in the area.

Call one of our team or book an appointment at a time that works for you to discuss your land and construction project in detail.

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