Why Should Trigg Buyers Plan Multi-Unit Finance Early?

Buying a site to build more than one dwelling needs a different loan structure from buying a house. The finance is tied to your plans, your builder's contract and how you intend to use each dwelling, so it pays to sort the structure before you sign for the land.

This article is for Trigg residents weighing up a site for townhouses or a duplex. It covers how lenders view the project, how drawdowns work and where the money and tax traps sit.

How Does Construction Finance Work for a Multi-Unit Site?

Construction finance releases your loan in stages as the build progresses, rather than as one lump sum. Many lenders only charge interest on the amount drawn down, so repayments start small and grow as more of the loan amount is released.

The lender usually pays the builder after each stage is complete and often after an inspection. This is called progressive drawdown. Lender terms such as the number of drawdowns, inspection requirements, time limits and fees vary between lenders. Requirements for an application also vary by lender, and lenders commonly ask for plans, a building contract and builder details. If you are weighing up a construction loan, a broker can compare lenders on those terms before you commit.

Why Lenders Treat Development Sites Differently

Lenders apply stricter capital rules to loans secured by property that is not yet finished. Under APRA's standard, this type of lending is generally classed as land acquisition, development and construction (ADC) lending, with an exception for a borrower's own home.

APRA's guidance says ADC loans are not limited to companies and include individuals developing investment properties. Some ADC loans carry a lower risk weight when total debt is under 75 per cent of qualifying development costs, and all other ADC loans carry a higher one. These are capital rules for lenders and do not set your rate. Lenders set their own deposit and contribution requirements, and these may be higher for development projects.

The guidance also says it would be reasonable for a lender to treat an incomplete duplex as an owner-occupied loan if you plan to live in one dwelling and rent the other. Each lender decides for itself, so ask early.

Lenders must also test whether you can afford repayments at a rate at least 3 percentage points above the loan rate. For a loan that starts interest-only, that test is run over the shorter period in which principal and interest apply. A borrowing capacity calculator gives you a rough idea before you speak to anyone.

Interest-Only Drawdowns: A Worked Example

Consider a Trigg owner who buys a site to build two townhouses, planning to live in one and rent out the other. The build is paid in stages, and the lender only charges interest on what has been released.

Suppose the drawn balance reaches $600,000 part-way through the build. At an illustrative rate of 6.75% p.a., interest-only repayments on that balance would be about $3,375 a month. Earlier in the build, when less has been drawn, repayments are lower.

This figure is illustrative and covers interest only. Actual cash flow depends on the lender's terms, the draw schedule, costs that change during the build, and the lender's serviceability assessment, which includes a buffer of at least 3 percentage points. When construction ends, the loan can move to a standard home loan. Principal and interest repayments will then be higher than interest-only, because the principal has to be paid off over a shorter remaining term. The trade-off is that interest-only repayments do not reduce the debt during the build.

Builder Deposits and Progress Payments in Western Australia

In Western Australia, the deposit on a home building contract valued from $7,500 to $500,000 is limited to 6.5 per cent. Progress payments must be genuine payments for work already performed or materials already supplied.

The builder must also take out home indemnity insurance and provide a certificate before demanding any payment. The rules do not prescribe set stages, so your contract and your lender's draw schedule need to line up. If a builder asks for money ahead of the work, raise it with your broker before paying. A multi-unit contract may sit above the $500,000 range, so have the contract checked by a building professional or lawyer.

On drawdowns, lenders may ask for a progress inspection before each payment. The cost and timing of inspections depend on the lender.

Land Loan Interest vs Construction Loan Interest for Tax

If you intend to rent out the finished dwellings, the ATO treats interest on a land loan and interest on a construction loan differently. While the land stays vacant, interest on money borrowed to buy it is generally not deductible, but interest on borrowings for the construction itself can be.

The ATO's example is a buyer with one loan for the land and a separate loan for building the house. Interest on the construction loan can be claimed, and interest on the land loan cannot while the land remains vacant. If one loan funds both, the interest must be apportioned. This is a general statement only, and no outcome is certain. Speak with your accountant before you choose a structure. If rental is part of the plan, our investment loans page explains how we approach that side of the finance.

Using Local Knowledge for a Trigg Build

Trigg sits within the City of Stirling. Check with the City of Stirling what approvals your specific proposal needs, including development approval and a building permit. Lenders generally require approvals before releasing construction funds, so confirm this with your lender. Our Trigg mortgage broker page covers how we work with local buyers, and if the site is a knock-down and rebuild, your existing home loan may also need a look.

Frequently Asked Questions