If you’re seeking a loan for your property development, this is probably one of the first questions that springs to mind. Not only is it important to know how to calculate your borrowing capacity, but the amount of money a lender is willing to contribute also serves as a clear indicator of how much faith potential lenders have in the success of your project.
While there are some minor differences across lenders and a great deal of difference in risk appetite, the methodologies used for determining lending amounts for property development is more or less universal. Let’s delve into them below:
Loan to Value Ratio (LVR)
Generally, funding amounts will be measured against the estimated value of the whole project upon completion or Gross Realisable Value (GRV). The lender will deduct the GST from the gross sales figures, and sometimes they will also deduct sales commissions and determine their lending limit against that.
A typical first mortgage facility through the non-bank sector will go up to 65% of the GRV, but in some cases, it’s possible to go to 70% or even 75%. Mezzanine financing may be required when going over 70% LVR.
Total Development Cost (TDC)
The other category that lenders will use to measure their funding amounts will be against the project’s Total Development Cost (TDC).
Typically, non-bank lenders are comfortable at 80% of TDC, but in some cases they’ll go as high as 85% or even a little higher. To get above this, you would generally need equity rather than debt. Banks are usually more comfortable at around 70% of TDC.
With mezzanine financing or preferred equity, lending amounts can go as high as 90% of TDC. To fund higher than 90% of TDC, you’ll likely need to give up equity in the project and potentially profit share, but this may be suitable if you are looking at an aggressive growth strategy, enabling you to run multiple profitable projects at one time.
What’s your borrowing power for your investment property?
By using the two measurement tools outlined above (LVR and TDC) and applying them to the unique circumstances of your specific property development project, you should be able to gain a relatively clear understanding of how much funding you should be able to secure for your upcoming property development.
Speak to MFEG
MFEG is a trusted partner for property developers, providing suitably tailored funding opportunities and solutions for qualifying borrowers. Enquire with our team today.