Development Construction Loan Interest payment options?

Hi,

First poster here. I'm thinking of getting into property subdivision and development. One of many things that is still not very clear to me is about the financing of the construction loan, more importantly the interest payment schedule. I've concern about the ability to service the interest.

From what I've read so far, there are two common options:
- Like typical construction loan, you start paying the interest monthly for the amount that have been drawn from the bank
- Capitalised the interest which then is payable at the end of the construction.

My questions:
- Which of the two are more commonly used? and if possible, please give some explain on the reason.
- With the 1st option, what will the lender use to calculate the borrower servicing capability? my only source of income is from employment. With my salary, no way i can service the loan towards the end of the development.
- With the 2nd option, what will happen if i can't find buyers after the development finishes?
- How hard is to get the 2nd option considering that i'm first time developer.
- Is there any other payment methods?

Thanks in advance

 

How big a project?

If small capitalisation won't be possible directly.

 

I got nothing on that moment. I just want to know the whole process first before dipping my feet in.

I'm looking to smart small as this will be my first. So, it will be 3-4 townhouses, total construction loan would be around 1-1.2M.

What is the typical threshold to get the capitalised interest loan?

 

On commercial projects, which tend to be 3-4 upwards it may be possible to capitalise depending on the figures. The required LVRs would usually need to be kept. These might be 60 to 70% of end value with some lender.s

 

From my understanding it's broken down to
Commercial loan - interest is capitalised
Residential loan - you pay the interest as per the draw downs

Resi is most commonly used for developments with 3 (sometimes 4) or less. Commercial for 5 or more.
For a resi loan they will look at your income plus rental appraisal for the end product.

 

If you can't afford the repayments then you would need commercial finance, which would rely on presales before you get the loan. So sell 2 off the plan, their contract price covers the build loan value and capitalised interest for the build period. Start building.

If you don't own the land outright, it gets trickier. You might need to sell all 4 before land purchase/construction starts.

If your worked income and the likely rental income is enough to make the repayments, then you might be able to find a lender that would do this under resi terms. Larger percentage loan and lower rates.

 

You can only cap interest using commercial finance.
In the current market commercial finance for a first time developer will be hard. Not impossible, but hard. If you think you will fund 80%+ interest cap as first time developer.... I would be very suprised if even the best broker could get you that.

If you are looking at under 70%lend on hard costs (Land+construction) you have a chance to add in Interest cap and GST funding. Will depend on end vals and 1,000 of other things though.

As alredy mentioned you will need pre-sales. usually sufficent levels of which to clear the debt.
If these fall over for some reason, the bank will take the development off you, send you broke, sell your first born and may even take one of your testicles.

All in all - sounds like a fairly high risk proposition to me, and you never know, I may be talking from experience.

Blacky

 

If you have other property you could set up a LOC and use this to pay the interest on the construction loan possibly.

But get tax advice.

 

Thanks everyone for advise. I get the gist of it.