How construction finance works: from land to lock-up

Construction finance funds a property development from settlement of the land through to a defined completion point — most commonly lock-up, sometimes through to practical completion or beyond, depending on the lender and the project. The structure is senior debt secured by first mortgage over the site, drawn down in stages against quantity-surveyor-certified progress, with the borrower's equity sitting first in the capital stack.

Aurelius Private originates and arranges construction finance across a non-bank lender panel: senior debt, stretch senior, mezzanine, and combined tranches, with facility sizes from $2M to $50M+. This guide walks the deal from land to lock-up, names what gets funded at each stage, and shows where bank construction finance hits limits that push deals into the non-bank market. It sits inside our broader guide to private lending in Australia.

The deal shape (typical private construction finance)

• Facility size: $2M to $50M+
• Maximum senior LVR: 65–70% against as-is land value at settlement
• Maximum senior TDC: 70–80% of total development cost; mezzanine pushes combined TDC to 85–90%
• Term: 12 to 24 months typical, sometimes 36 on staged projects
• Senior pricing: 8–12% per annum
• Settlement timeline: 3–6 weeks from instruction, subject to QS report and valuation
• Presales coverage: 0–50% required on senior debt depending on lender and asset class; some lenders write deals with no presales at all

What is construction finance?

Construction finance is senior debt secured by first mortgage over a development site, structured to fund land settlement and the build itself in staged drawdowns until a defined completion event. The defining feature is the staged drawdown mechanism. The borrower doesn't receive the full facility on day one. The lender funds an initial tranche to settle the land (or refinance an existing land loan) and then funds subsequent tranches against quantity-surveyor-certified construction progress.

The borrower's equity sits first in the capital stack. The senior lender's exposure starts at the LVR cap on land at settlement and grows as construction value adds to the security. Equity contribution at settlement closes the gap between the land cost (plus stamps and costs) and the senior debt available against the land value. Equity also funds the early construction works that haven't yet reached a claimable QS milestone.

The stages: from land to lock-up

Construction works in residential and mixed-use projects break into a standardised sequence. The terminology varies slightly between states and contract templates, but the underlying stage gates are the same. Each stage gate is a point at which the QS can certify a percentage of the build complete, which becomes the basis for a drawdown claim.

1. Land settlement. The initial drawdown funds the purchase or refinance of the development site. Senior LVR against as-is land value typically caps at 65–70%. The balance comes from borrower equity, which has to be evidenced before the senior tranche releases. The drawdown mechanics match a standard commercial property settlement — title transfers, security registers, the senior lender funds at the LVR cap.

2. Slab (base) stage. First construction milestone. Site works, excavation, footings, and concrete slab pour. Typical progress claim at completion of this stage is 15–20% of the build contract value. The QS attends site, verifies the works are complete and compliant with the building permit, and certifies the claim. The senior lender funds the claim net of retention (typically 5–10%).

3. Frame stage. Structural framing of walls and roof. Progress claim typically 20–25% of build contract value at this milestone. By this point cumulative drawdowns on the build cost have reached around 35–45% of contract value, net of retention.

4. Lock-up stage.Windows, external doors, and roof complete. The building is now weatherproof ("locked up") and internal works can begin without weather exposure. Progress claim typically 20–25% of build contract value at this milestone. Lock-up is where many private construction facilities are sized to land. By this point the build has shed most of the weather and structural risk that drove pricing higher, and the senior lender can exit cleanly into a refinance or a take-out sale.

5. Fixing stage. Internal linings, cabinetry, plumbing, and electrical rough-in. Progress claim typically 15–20% of build contract value. The project is now past lock-up and the remaining works are largely internal trades, with much lower weather and structural risk.

6. Practical completion (PC). Final QS sign-off. Council inspections complete, occupancy certificate issued, final defect list resolved. Progress claim 5–10% of build contract value, plus release of accumulated retention (subject to defects-liability period rules per the build contract).

Not all construction facilities run all the way to PC. Some are sized to lock-up only — the borrower refinances the residual build out of a finished-condition mortgage or a separate residual stock facility. Others run with the same senior lender through to PC. The right structure depends on the asset class, the development timeline, and the lender's appetite for the back-end risk past lock-up.

What private lenders actually fund

The phrase "private lenders fund construction" hides a lot of variation. Lender appetite varies sharply by project type, location, capital-stack position, and the borrower's track record. The construction finance Aurelius Private places sits across senior, stretch senior, and mezzanine layers, with appetite varying lender-by-lender even within a single layer.

Project types regularly placed:

• Residential apartment buildings (3 to 100+ units) — first-mortgage senior debt, 65–80% TDC depending on presales and asset quality
• Mixed-use developments (residential over retail or commercial), with the residential side typically driving the deal economics
• Townhouse and terrace developments (4–30 units) at 65–80% TDC, sometimes higher with mezzanine
• Industrial estates and warehousing, where appetite has grown sharply through 2024–2026 as the asset class has firmed
• Build-to-rent (BTR) with senior structures designed to roll into long-dated investment debt at PC
• Spec luxury residential, placed but priced higher where the exit is a single high-end sale rather than presold settlements

Project types that struggle to place:

• Rural and remote-area residential where end-value comparables are thin
• Speculative commercial without anchor tenants or pre-leases
• Specialist asset classes (childcare, service stations, motels) without an operator-tenant locked in
• Very small developments below $2M total cost, where lender fixed costs make the deal uneconomic

Capital-stack position matters more than the headline rate. A senior facility at 70% TDC and a stretch facility at 80% TDC look like the same product on the surface; they're not. Stretch senior carries more risk and prices accordingly — typically 100–200 basis points above a clean senior. Mezzanine sits behind senior in the capital stack and prices 400–800 bps wider again. The borrower's all-in cost across the capital stack is what matters, not the headline senior rate.

How drawdowns work in practice

The mechanics of a construction drawdown matter because they shape the working-capital position the borrower runs during the build.

1. Builder issues a progress claim — typically every 4 to 6 weeks, valued against the build contract schedule.
2. Quantity surveyor inspects and certifies.The QS reports to the lender, not the builder. The QS confirms the works claimed are physically complete, compliant with the building approval, and consistent with the QS's pre-funding cost-to-complete estimate.
3. Lender releases the drawdown — net of retention (typically 5–10% per claim) and any contingency hold.
4. Funds settle into the project account and the builder is paid.

Between QS inspections the borrower is funding works out of equity or working capital. That gap is one of the reasons developer cash-flow planning matters as much as the headline LVR. A deal sized correctly on paper can still fail commercially if the developer can't fund the 4 to 6 week working-capital window between drawdowns.

Contingency is the lender's reserve against cost overrun. If the project comes in on budget, contingency releases at PC. If costs overrun, contingency absorbs the overrun before the lender takes any further exposure. Contingency sizing varies — typically 5–10% of build cost for clean projects, more for complex builds or first-time builders.

Where bank construction finance hits its limit

The bank construction finance market in Australia has well-defined edges. Bank credit policy operates inside those edges and rarely outside them. Private construction finance lives in the gaps. Non-bank lending's share of Australian commercial real estate and development credit has grown steadily through successive RBA Financial Stability Reviews, with banks ceding ground in higher-LVR construction and lower-presales deal structures.

Presales coverage. The biggest single trigger for a bank decline. Major banks require 100% debt cover from qualifying presales — presales contracts at sale prices that, on settlement, fully repay the construction facility plus interest and selling costs. For a $20M facility on a residential project that means roughly $30M of qualifying presales need to be in place before construction starts. Private senior lenders typically write to 0–50% presales coverage; some write with no presales at all.

LVR and TDC caps.Bank senior debt for residential apartment construction usually caps around 65% TDC. Private senior writes to 70–80% TDC standard, and stretch structures push to 80–85%. Where the borrower's available equity falls short of the bank's TDC cap, private debt fills the gap.

Postcode and asset-class concentration.Banks maintain concentration limits at postcode and asset-class level. Once a bank has funded a certain volume of a specific area or asset class, new deals get declined regardless of merit. Private lenders don't operate concentration policies in the same way.

Speed and certainty. Bank construction approval timelines run 8 to 14 weeks from full submission to formal approval. Private senior issues indicative terms within 5 business days and settles in 3 to 6 weeks. For a developer facing a 60-day land settlement with no construction approval yet in place, that timeline gap is fatal.

Borrower profile. Banks require track-record evidence (completed comparable projects, audited financials, clean credit history). Private lenders weight track record but assess the deal first, the borrower second. A first-time developer with a strong deal and a credible builder can place private finance where a bank decline is almost automatic.

Frequently asked questions

How does construction finance differ from a regular commercial property loan?

A regular commercial property loan funds a complete, income-producing asset and is drawn down in full at settlement. Construction finance funds the development of an asset that doesn't exist yet, and draws down in stages against quantity-surveyor-certified progress. The risk profile differs — there's no income to service the debt during construction, and the security value grows over the term as works are completed. Pricing reflects the additional risk: construction finance prices above completed-asset commercial mortgages, with the gap widening at higher TDC ratios.

How long does construction finance take to settle?

For a clean deal with a credible builder, complete plans, an existing development approval, and a borrower with available equity, indicative terms can issue within 5 business days and formal settlement reaches in 3 to 6 weeks. The bottleneck is almost always the QS's initial cost-to-complete report and the lender's valuation, both of which take 2 to 4 weeks. Borrowers who arrive with the QS report and valuation already commissioned settle faster.

What's the difference between senior debt, stretch senior, and mezzanine?

Senior debt is the first-mortgage facility, typically capped at 70–80% TDC, priced at the lower end of private construction pricing (8–12% per annum). Stretch senior pushes the LVR or TDC cap higher by absorbing more risk in a single tranche, with pricing widening 100–200 bps. Mezzanine sits behind the senior in the capital stack and is typically used to push combined leverage above the senior cap, with pricing 400–800 bps wider than the senior again. The borrower's all-in cost depends on the blend, not the senior rate alone.

Do I need presales to get construction finance?

Banks usually require 100% debt cover from qualifying presales before construction starts. Private senior coverage requirements range from 0 to 50% of debt depending on the lender, the project type, and the borrower's track record. Some lenders on the panel write residential construction with no presales required at all, accepting a higher pricing band to compensate for the residual-stock risk at PC. The presales position is one of the first things assessed when matching a deal to a lender.

What happens if construction runs over budget?

The contingency held back through drawdowns is the lender's first reserve against overrun. If costs run higher than the original QS-certified cost to complete, the contingency releases progressively to cover the gap before any further lender exposure. If contingency is exhausted, the borrower funds the overrun out of equity. If equity is exhausted, the lender's options narrow — further advances against the existing security typically need a formal facility variation, and the project may need a mezzanine or additional-equity injection to complete. Sizing contingency correctly at the front end is one of the cheapest forms of project insurance.

Can I get construction finance for a small project — say, a 4-unit townhouse build?

Yes, but the deal-size economics shift below $2M total cost. Lender fixed costs (QS reports, valuation, legal, lender admin) are largely independent of facility size, so all-in cost as a percentage of debt rises as the deal gets smaller. Senior lenders on the panel write deals from around $1.5M facility size on the right project; below that, the structure tends to shift to a senior + private mezzanine or a higher-leverage single-tranche structure that absorbs the cost premium. A 4-unit townhouse build at $2–3M total cost is a regularly-placed deal shape.

Got a development to finance?

Aurelius Private originates and arranges construction senior, stretch senior, and mezzanine structures from $2M to $50M+ across a non-bank lender panel. Send the scenario (site, build cost, presales position, exit, borrower equity) and we come back within four business hours with an indicative structure, lender path, and pricing band before any formal application. Apply now.