Development funding tips to get you started
Thinking about applying for construction or development funding? Here’s what lenders really want to see.
One of the biggest misconceptions about construction or development funding is that it’s all about the numbers.
While a strong feasibility is important, experienced lenders are looking at far more than just LVRs and your projected profit.
Whether you're approaching a bank or a specialist construction lender, they're really asking themselves one simple question:
"Can this borrower successfully deliver this project and repay our money?"
If you're planning a spec build, subdivision or small development, here are some of the key things lenders are looking for.
1. They're lending to you first
Before a lender assesses your project, they'll assess you.
Some of the questions they'll be asking include:
Have you completed projects before?
What's your background?
Do you have experience in construction or property?
Have you successfully delivered similar developments?
Who have you worked with previously?
Don't be surprised if a lender asks to see your CV or wants to understand your experience in more detail.
As part of their due diligence, lenders will also complete credit checks, and it's increasingly common for them to search online to learn more about you and your business. If adverse media, court proceedings, failed developments or other negative information appears online, you can generally expect questions about it. Character and reputation matter.
If this is your first development, funding can still be possible. It just means lenders are likely to look more closely at the strength of the rest of the application, including your team, equity contribution and exit strategy.
2. Have you got enough skin in the game?
Funders like to see borrowers contributing meaningful equity to a project.
Having your own money invested demonstrates commitment and reduces the lender's risk. While the amount of equity required varies between funders and projects, borrowers contributing more of their own funds will generally have access to a wider range of funding options and, in many cases, more competitive pricing.
Like most lending, pricing is risk based. The more equity you contribute, the lower the perceived risk often becomes.
3. Is this the right product for this location?
This has become increasingly important over the past couple of years.
Funders are much more selective than they were during the boom.
They're asking questions like:
Is there genuine buyer demand?
Does the typology suit the location?
Is the market already saturated?
How quickly is this product likely to sell?
Auckland, for example, currently has a large amount of similar townhouse stock on the market.
Before committing to a project, spend time talking with experienced local real estate agents. They know what buyers are looking for and what is sitting unsold.
Good market research can be the difference between a project that flies out the door and one that struggles to sell.
4. Good design sells
Experienced funders understand that good design reduces risk.
A well designed home often sells faster and for a stronger price than one that simply tries to maximise floor area.
This doesn't necessarily mean spending significantly more money.
It means thinking carefully about the finished product.
Consider investing in:
a good architect or designer
a colour consultant
quality landscaping
well planned outdoor living spaces
strong street appeal
higher thermal performance, Homestar ratings and other energy efficient features
With electricity prices continuing to rise, buyers are placing greater value on homes that are comfortable to live in and cheaper to run. Features such as better insulation, improved thermal performance and, in some cases, rooftop solar can help differentiate your development from competing stock.
At the end of the day, funders aren't just financing a build. They're financing the successful sale of that build. Homes that are thoughtfully designed, energy efficient and genuinely desirable give funders greater confidence in the project's exit strategy.
5. Your team matters
Funders don't just assess the borrower.
They also look closely at everyone involved in the project.
Who is your:
builder?
architect?
engineer?
project manager?
quantity surveyor?
A strong, experienced team gives lenders confidence that the project can actually be delivered.
6. Choosing the right site matters
Not every development site is an easy one to finance.
Funders are increasingly looking beyond the numbers and assessing the risks associated with the land itself.
Things that can make lenders nervous include:
flood plains and overland flow paths
overhead transmission pylons and high voltage lines
steep or difficult building sites
significant retaining requirements
geotechnical concerns
access issues or shared driveways
unusual easements or title restrictions
These sorts of issues can increase construction costs, create delays, or make the finished homes less attractive to buyers. Ultimately, that can affect the lender's most important consideration, the exit strategy.
Flood risk has become an area of particular focus in recent years, with many lenders taking a much closer look at flood maps and climate related risks before approving development funding.
Just because a project looks profitable on paper doesn't necessarily mean it will be financeable.
That's why it's worth speaking with your mortgage adviser before you commit to purchasing a site. An early conversation can help identify potential funding issues before you go unconditional, giving you the opportunity to adjust your plans or even reconsider the site before significant costs are incurred.
7. Your feasibility needs to stack up
Your feasibility is often the first thing a lending manager reviews.
Experienced credit managers have assessed hundreds of projects.
They can usually identify an unrealistic feasibility within minutes.
Common omissions include:
funding costs
contingency allowances
GST
professional fees
marketing costs
sales commissions
holding costs
realistic construction timeframes
A well prepared feasibility immediately creates confidence.
A poorly prepared feasibility does the opposite.
It tells a lender you may not have fully thought the project through.
8. Can you service the loan during construction?
Construction funding isn't just about whether the project is profitable.
Funders also want to understand how you'll meet the interest costs while the project is being built.
Some facilities allow interest to be capitalised into the loan.
Others require borrowers to make monthly interest payments throughout construction.
If you're servicing the interest each month, lenders will usually want evidence that you have sufficient income or cash reserves to comfortably cover those payments.
Cashflow is just as important as profitability.
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9. What happens if the project goes over budget?
Every experienced lender knows that construction projects can experience unexpected costs.
The question isn't whether something might change.
The question is:
Who is paying if it does?
Funders will often ask:
Have you included a contingency?
Is the contingency realistic?
If costs increase, where will the additional funds come from?
Developers who haven't allowed for cost overruns immediately increase the lender's risk.
A sensible contingency demonstrates you've planned for the unexpected.
10. Don't underestimate GST
GST is one of the biggest areas first time developers underestimate when preparing a feasibility for a lender.
Often, it's not the total GST payable at the end of the project that causes problems. It's the timing of GST payments and refunds throughout the build.
Construction funders will generally advance funds on a GST exclusive basis. That means you'll often need to fund the GST component yourself until it is refunded by Inland Revenue.
Funders will want to understand:
whether you're GST registered
whether your feasibility has been prepared on a GST exclusive basis
how GST has been treated on the land purchase
the GST payable on construction, consultant and professional costs
when GST refunds are expected to be received
how you'll fund any GST shortfalls during construction
Many developers choose to move onto monthly GST returns while a project is underway. Although it creates a little more administration, it can significantly improve cashflow by reducing the time you're waiting for GST refunds.
Funders will also consider what happens if an IRD GST refund is delayed or selected for audit. Do you have sufficient working capital or a GST facility available to bridge the gap?
Getting GST wrong can quickly create cashflow pressure, even on an otherwise profitable project.
11. Just because you can develop a site doesn't mean you should
One of the most common conversations I have is with homeowners who tell me they're thinking about subdividing their backyard or developing their section.
My first question is usually:
"Have you run a full feasibility?"
Quite often, the answer is no.
Just because a site can be developed doesn't necessarily mean it should be.
Every development carries risk. Before committing, you need to understand whether the expected return justifies the amount of capital, time and risk involved.
Funders think exactly the same way.
They're not just looking at whether a project breaks even. They're assessing whether there's enough margin in the deal to absorb unexpected costs, market movements or delays while still leaving a commercially viable project.
A feasibility showing only a modest profit can quickly disappear if construction costs increase, interest rates rise, sales take longer than expected, or valuations come in below forecast.
That's why it's so important to complete a realistic feasibility before purchasing a site or lodging resource consent. Sometimes the numbers simply don't stack up.
Every lender has its own return expectations, which are considered alongside factors such as borrower experience, equity contribution, project size and overall risk. A lower margin doesn't necessarily mean a project won't be funded, but it does mean the rest of the application generally needs to be stronger.
Sometimes the smartest development decision you can make is deciding not to proceed. Walking away from a marginal project today can save you a significant amount of money, stress and disappointment down the track.
12. Exit strategy is everything
One of the first questions every lender asks is:
"How do we get repaid?"
Your exit strategy is one of the biggest factors in whether a project gets funded.
If your strategy is to sell the completed homes, funders will be looking closely at:
Expected sale prices.
Current market demand.
Comparable sales evidence.
Likely selling timeframes.
Valuation support.
Any proposed presales.
What happens if sales take longer than expected.
If your strategy is to retain the properties, the conversation changes.
Funders will want to understand whether the completed properties are likely to meet bank servicing requirements if they're refinanced onto long term lending. They'll also want comfort that there are suitable refinancing options available, whether that's with a mainstream bank or another lender willing to hold any residual stock.
In today's market, funders are looking beyond the construction phase. They want confidence that there's a realistic and achievable path to repaying the development loan, whatever your chosen exit strategy may be.
13. Your timeline needs to be realistic
Optimistic timelines don't impress lenders.
Realistic ones do.
Allow for:
consenting delays
weather
labour shortages
inspection delays
title delays
slower sales
Experienced lending managers know that projects rarely run exactly to schedule.
Demonstrating you've allowed for potential delays builds confidence.
14. Expect a site visit
Most construction and development funders will want to inspect the site.
This isn't simply a box ticking exercise.
Lending managers will often identify risks that aren't obvious from plans or photographs.
They may also want to meet you.
Character still matters.
Meeting borrowers face to face helps lenders better understand the person they're backing.
15. Communication counts
Very few developments run exactly according to plan.
Unexpected delays happen.
Costs increase.
Contractors get held up.
Good borrowers communicate early.
If something changes, pick up the phone.
Funders are almost always more understanding when they're kept informed.
Poor communication is one of the quickest ways to lose a lender's confidence.
New Zealand is a relatively small market.
A good relationship with a lender today can make funding your next project much easier.
A poor experience can make future funding significantly more difficult.
16. Banks and non-bank funders think differently
Banks generally offer more competitive pricing.
However, they're often:
more conservative
require greater presales
rely heavily on valuations and QS reports
have stricter credit policy
Specialist construction and development funders are often more flexible.
But flexibility doesn't generally mean lower standards.
They're still looking closely at:
your experience
the quality of the project
the exit strategy
your equity contribution
overall risk
Ultimately, every lender is responsible for protecting either their depositors or investors.
They simply want confidence that the project can be completed successfully and that they'll be repaid.
Preparation Makes Funding Easier
The strongest development applications aren't always the ones showing the biggest profit.
They're the ones that are the best prepared.
Funders want confidence that you've thought through every aspect of the project before asking them to invest alongside you.
That means understanding your market, assembling the right team, preparing a realistic feasibility, allowing for contingencies, understanding GST cashflow, and presenting a clear plan for how the project will be delivered and repaid.
The more confidence you give a lender, the more likely they are to support your project.
If you're considering a spec build, subdivision or development, it's worth speaking with an adviser before committing to purchasing a site. A conversation early in the process can often open up more funding options, identify potential issues before they become expensive problems, and help position your application for the best possible outcome.
At Colab Mortgages, we work with both the major banks and a wide range of specialist construction and development funders. Every project is different, and understanding which lenders are likely to support your proposal can save significant time and frustration.
If you're planning your next spec build, subdivision or development, get in touch. We'd love to chat about your plans and how we can help.
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