How Does Private Construction Funding Work?

Private construction funding is a form of short-term finance used to fund building works, renovations, duplex builds, townhouse developments, knock-down rebuilds and small-to-medium scale residential or commercial projects. Unlike bank construction loans—which require detailed feasibility studies, full financials, quantity surveyor reports and long approval periods—private lenders focus primarily on:

• the value of the land

• the end value (on completion)

• the builder’s experience

• the strength of the project

• equity and peak debt

• the exit strategy

Private construction finance is significantly faster, more flexible and more accessible for developers and builders who do not meet traditional bank requirements.

For live product information, visit: Construction Loans.

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Why Borrowers Use Private Construction Funding

Borrowers choose private construction funding because banks often decline or delay projects due to:

• incomplete financials

• credit impairments

• insufficient presales

• unusual designs or project types

• lack of full QS or feasibility reports

• tight settlement timelines

• complex ownership structures

• the borrower wanting interest capitalised

Private lenders use commercial judgement rather than strict credit policy, enabling projects to begin sooner. Developers who also need land acquisition funding may consider: Development Loans.

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How Private Construction Funding Works

Private construction loans follow a simple, efficient structure designed for speed and practicality.

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1. Assessment of the Security Property

Private lenders look at:

• the land value (current as-is value)

• the proposed completed value (GRV)

• planning permits

• zoning and site constraints

• comparable projects nearby

• builder credentials and experience

This forms the basis of the loan amount and LVR.

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2. Determining Peak Debt

Peak debt is the maximum loan exposure during the build. It includes:

• land debt (if applicable)

• construction costs

• professional fees

• interest (if capitalised)

• lender fees

• legal and valuation costs

Private lenders typically offer:

• up to 65–75% of GRV, or

• up to 80–90% of total development cost (TDC) depending on project quality

More detail on lender calculations can be found at: LVR & Lending Scope.

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3. Funding Structure & Drawdowns

Private construction loans may be structured in one of two ways:

 

A. Full Upfront Advance

Some private lenders release the entire construction facility upfront, allowing the borrower to manage progress payments and builder invoices directly.
This is ideal when:

• the borrower wants flexibility

• the builder does not accept lender progress draws

• the project works in stages that are not easy to certify

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B. Progress Drawdowns (Similar to Bank Construction)

Other lenders prefer staged repayments based on construction milestones:

1. Base/Slab

2. Frame

3. Lock-up

4. Fixing

5. Completion

Private lenders may require:

• builder invoices

• progress photos

• site inspections

However, private lenders are significantly faster and easier to deal with than banks.

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4. Interest Capitalisation

Most private construction loans allow for interest to be capitalised, meaning borrowers do not need to make monthly repayments.

Interest is added to the loan balance and repaid at the end via:

• sale of completed dwellings

• refinance to a long-term lender

• residual stock finance

This is a major advantage over bank construction loans, which often require monthly servicing.

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5. Exit Strategy

The lender must see a clear and realistic exit strategy:

• sale of completed properties

• refinance to a long-term commercial or residential lender

• refinance using rental income once the property is leased

• sale of part of the development (e.g., one townhouse funds the debt)

A strong exit strategy increases approval probability and helps secure better pricing.

Projects with residual stock may also require: Bridging Loans.

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Advantages of Private Construction Funding

Borrowers commonly choose private lenders because they offer:

1. Fast turnaround

Approvals can occur within days—not months.

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2. Minimal presales

Many private lenders do not require presales, making it easier to begin projects immediately.

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3. Flexible documentation

No tax returns or complex financials required if equity is strong.

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4. Higher leverage options

Up to 75% GRV or higher TDC coverage in some cases.

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5. Capitalised interest

No monthly repayments during construction.

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6. Suited to complex projects

Ideal for developers who:

• are building for themselves

• have irregular income

• own multiple entities

• have experienced project delays

• need urgent settlement

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Risks and Considerations

Borrowers should be aware that private construction funding may have:

• higher interest rates than traditional bank loans

• shorter loan terms (typically 6–24 months)

• stricter timelines for project completion

• monitoring requirements for progress

However, flexibility, speed and accessibility often outweigh these considerations for small-to-medium-scale developers.

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Example: How Private Construction Funding Works in Practice

A developer in Queensland is completing a duplex build valued at $1.8M on completion. The total construction cost is $1.1M, and the land is unencumbered.

A private lender approves:

• 70% of GRV ($1.26M)

• Full capitalised interest

• Progress drawdowns for each construction milestone

The project is completed within 10 months, and the duplex is sold.
Loan is fully repaid from settlement proceeds, with surplus cash returned to the developer.

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FAQs: Private Construction Funding

What documents are required?

Typically: building plans, builder contract, schedule of works, insurance, and valuation.

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Do private lenders require presales?

Often no, which is a major advantage over banks.

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Can interest be capitalised?

Yes. Most private construction loans allow capitalised interest.

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How fast can a private construction loan settle?

In urgent cases, approval and settlement can occur within 5–10 business days.

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What types of projects qualify?

Townhouses, duplexes, luxury homes, renovations, small commercial builds, and multi-unit projects (case-by-case).