Avoid these mistakes when funding Northcote apartment sites

Purchasing land to build apartments in Northcote requires a funding structure that accounts for both the land acquisition and the staged construction process.

Most lenders treat apartment construction differently from single residential builds because the risk profile, approval requirements, and draw schedules involve multiple dwellings rather than one home. A construction loan for this purpose typically involves two stages: an initial advance to purchase the land, followed by progressive drawdowns as construction reaches specific milestones. The lender will usually require council approval and a fixed price building contract before releasing any construction funds, even if the land purchase has already settled.

Funding the land purchase before council approval is finalised

You cannot draw construction funds until council plans are approved and a registered builder is under contract. If you purchase land before securing a development application, you will hold that land on interest-only repayments until construction can legally commence. In Northcote, where sites suitable for multi-unit development are limited and often contested, the period between purchase and approval can extend beyond twelve months.

Consider a buyer who acquires a 600-square-metre block zoned for residential growth in the Westgarth precinct. The land settles in March, but the development application for a six-apartment building is not approved until November. During those eight months, the buyer pays interest on the full land loan amount without any construction drawdowns occurring. The lender does not release construction funds in advance of council approval, so the project sits idle while carrying costs accumulate.

If you are purchasing land without a current permit, structure the land loan as a separate facility with a longer interest-only period, rather than rolling it directly into a construction to permanent loan that assumes building will commence within 60 to 90 days.

Underestimating the deposit required for apartment construction

Lenders assess apartment construction as higher risk than single dwelling projects. Most require a minimum deposit of 20 to 30 per cent of the combined land and construction cost, and some will add a further margin if you are not an experienced developer. The loan amount is determined by the lower of cost or as-complete valuation, which means if your build cost exceeds the projected end value, the lender will cap the loan at the valuation figure.

In our experience, buyers often secure land with a 10 per cent deposit and assume they can fund construction on the same basis. That approach does not align with how construction finance works for multi-unit developments. The lender will require you to demonstrate genuine savings or equity sufficient to cover the gap between the land price, the total construction cost, and the maximum loan-to-value ratio they are willing to lend against.

If the land and construction package totals $1.8 million and the lender caps the loan at 75 per cent of cost, you will need to provide at least $450,000 in cash or equity before any funds are advanced. This figure does not include professional fees, council contributions, or the cost of services and connections, which can add another $80,000 to $120,000 depending on the site.

Selecting a cost-plus contract instead of a fixed price building contract

Most lenders will only provide construction funding against a fixed price building contract with a registered builder. A cost-plus contract, where the builder charges actual costs plus a margin, creates uncertainty around the final loan amount and exposes the lender to potential cost overruns. If you proceed with a cost-plus arrangement, expect the lender to either decline the application or require a much larger cash buffer to cover variation risk.

A fixed price contract sets out the total build cost in advance and includes allowances for materials, labour, and subcontractor payments. The lender uses this figure to structure the progressive drawdown schedule, releasing funds at agreed stages such as slab completion, frame and lockup, internal fit-out, and practical completion. Without a fixed price, the lender cannot determine how much to release at each stage, and the construction loan application will stall during assessment.

Northcote Council requires specific design standards for multi-unit developments, particularly around heritage overlays and streetscape integration. These requirements often lead to design changes during the approval process, which can then trigger variations if the builder has already signed a contract. Lock in council approval before signing the building contract, so the design is final and the builder can commit to a fixed price without allowing excessive contingency margins.

Assuming the same draw schedule applies to apartment builds as single homes

A standard residential construction loan might release funds across four or five stages. Apartment construction involves more stages because the build is more complex and lenders want to verify progress before releasing larger sums. Expect six to eight progress inspections, each tied to specific milestones such as footings, slab, frame, roof, lockup, internal fit-out, external completion, and final inspection.

Each drawdown requires a progress inspection by a quantity surveyor or bank-appointed inspector, and most lenders charge a progressive drawing fee for each inspection, typically between $300 and $600 per drawdown. If your build involves eight stages, budget an additional $2,400 to $4,800 in inspection fees across the construction period. These are separate from the loan establishment fees and are charged each time the lender releases funds.

The builder will expect payment according to the progress payment schedule in the contract, which may not align exactly with the lender's draw schedule. If the builder completes frame stage but the lender's inspector is not available for two weeks, the payment to the builder is delayed. Managing this timing requires clear communication between the builder, the broker, and the lender to confirm that inspection dates align with contract milestones.

Missing the condition to commence building within a set period from the disclosure date

Most construction loan approvals include a condition that building must commence within a set period from the disclosure date, usually 90 to 180 days depending on the lender. If construction does not start within that window, the approval lapses and you will need to reapply. Interest rates, lending policies, and your financial position may have changed by that point, so the reapproval is not automatic.

In Northcote, delays caused by builder availability, materials supply, or final council sign-offs are common. If your fixed price building contract lists a commencement date that falls outside the lender's required timeframe, the loan approval will expire before you can draw the first instalment. Confirm the builder's start date before submitting the construction loan application, and ensure the lender's commencement condition allows enough time for any remaining council or utility approvals.

Some lenders also require that construction reach practical completion within 12 months of the first drawdown. Apartment builds rarely finish within that period, so if you are working with a lender that imposes a strict completion deadline, request an extension clause in the loan terms or select a lender that offers more realistic timeframes for multi-unit projects.

Not structuring interest-only repayment options during construction

During construction, lenders only charge interest on the amount drawn down, not the full approved loan amount. Repayments are typically interest-only until practical completion, at which point the loan converts to principal and interest over the agreed term. If you plan to sell the apartments on completion rather than hold them as investment properties, structure the loan so that it remains interest-only through to settlement of the sales, rather than converting to principal and interest as soon as the building is finished.

If the loan converts too early, you will be making principal and interest repayments on the full construction amount while waiting for buyers to settle. That can create a cash flow issue, particularly if you are holding six or more units and sales take three to six months to finalise. Discuss the conversion trigger with your broker during the application stage, and ensure the loan terms allow for a delayed conversion or the option to extend the interest-only period if required.

Andor Financial works with lenders who provide construction finance for apartment developments and can structure the loan to match your project timeline and exit strategy. Call one of our team or book an appointment at a time that works for you.

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