How to Fund a Townhouse Development: A Step-by-Step Guide

What Is Townhouse Construction Finance?

Townhouse construction finance is a specialist form of property development lending used to fund the construction of two or more attached or semi-detached dwellings on a single title - typically for on-sale upon completion.

Unlike standard residential construction loans, townhouse finance is assessed on the strength of the asset, the development feasibility, and the exit strategy - not the borrower's personal income. This makes it accessible to a much broader range of developers, including those who wouldn't qualify through a traditional bank.

How the Funding Structure Works

Construction loans for townhouse projects are typically structured as a facility that is drawn down in stages as construction milestones are reached. This is known as a progress draw or staged drawdown structure.

Typical draw stages

• Initial draw - land component and preliminary costs
• Slab / base stage - once footings and slab are completed
• Frame stage - structural framing completed and inspected
• Lock-up stage - roofing, windows, and external doors installed
• Fixing stage - internal fit-out, plumbing, and electrical roughed in
• Practical completion - final draw on project completion

Interest is only charged on the drawn portion of the facility, which keeps holding costs lower during the construction period.

LVR, Loan Size & Key Parameters

Townhouse construction loans are assessed against the Gross Realisation Value (GRV) - the projected total sale value of all completed units. This is different to how residential lenders assess loans, and it's why non-bank lenders can fund projects that banks cannot.

Typical lending parameters

• Loan size: Up to $10 million
• LVR: Up to 65% of GRV (75% with a second mortgage structure)
• Term: Up to 24 months
• Interest structure: Capitalised - no monthly repayments during construction
• Security: First registered mortgage over the development site
• Presales: Not required on many projects

Who Is Eligible?

Townhouse construction finance is available to a wide range of borrowers, including:

Typical draw stages

• Individual developers and investors
• Company borrowers (Pty Ltd)
• Discretionary and unit trust borrowers
• First-time developers with a strong asset and clear exit
• Borrowers declined by banks due to income, credit, or structure
• Developers with partially completed or distressed projectsDevelopers with partially completed or distressed projects

The primary eligibility factors are the strength of the asset, the feasibility of the project, and the clarity of the exit strategy - not personal income or employment status.

Why Banks Often Decline Townhouse Projects

Traditional banks struggle with townhouse construction projects for several structural reasons:

• Income verification requirements: - Banks require demonstrated personal income to service the debt, which many developers cannot show
• Presale requirements: - Most banks require 100% presales before releasing funds, which is impractical for small developments
• Company and trust restrictions: - Banks apply strict conditions to non-individual borrowers
• Credit committee delays: - Decisions go through committees that meet infrequently, adding weeks to approval timelines
• Regional location penalties: - Banks apply conservative LVR caps for projects outside major metropolitan areas