Avoid these 6 mistakes when buying land for townhouses

Buying land to build townhouses sounds straightforward until you realise most lenders treat it differently to a standard house and land package.

The main difference is the loan structure. When you purchase land with the intent to build multiple dwellings, you need construction finance that releases funds progressively as each stage of the build completes. Your lender will require a registered builder working from a fixed price building contract, council approval in place before settlement, and a clear schedule showing when progress payments fall due. If any of those pieces are missing, your application stalls.

Construction finance releases funds as you build, not upfront

You pay for the land first, then the lender advances funds in stages as construction progresses. Each drawdown is tied to a specific milestone such as slab down, frame up, or lock-up stage. The lender arranges a progress inspection before releasing each payment, and you only pay interest on the amount drawn down so far. That keeps your repayments lower during the build, but it also means you need enough cash or equity to cover the land purchase and any initial costs before the first drawdown arrives.

Consider a teacher planning to build two townhouses on a block they have found. They purchase the land for $400,000 using savings and equity from their existing home. The build contract is $600,000, split across six progress payments. After settlement, they pay interest only on the land loan until the first stage is complete. Once the builder completes the slab and the lender's valuer confirms it, the first progress payment of $100,000 is released. Interest now applies to $500,000. This continues until all six stages are done and the loan converts to a standard mortgage. The advantage is that repayments stay manageable while the project is underway. The challenge is timing your cash flow so you can cover holding costs on the land while waiting for council approval to start the build.

Lenders require council approval before they settle the land purchase

Most lenders will not release funds to purchase land unless you have a development application approved and a fixed price building contract signed with a registered builder. That means you need to engage a builder, finalise plans, lodge your application with council, and wait for approval before your finance can proceed. If council requests changes or the approval is delayed, your finance approval may lapse.

In our experience, teachers often underestimate how long council approval takes, particularly for dual occupancy or townhouse developments. Some councils require detailed reports on stormwater, traffic impact, and neighbour consultation before they approve the plans. If your lender gives you a four-month approval window and council takes five months to respond, you may need to reapply for finance or negotiate an extension with the lender.

The construction loan converts to a standard mortgage once the build finishes

Once all progress payments are complete and the final inspection is done, the loan converts from construction mode to a standard home loan. At that point, you can choose to keep it as interest-only if you plan to rent out the townhouses, or switch to principal and interest repayments if you intend to sell one and live in the other. Some lenders allow you to lock in a portion of the loan at a fixed rate during construction, which can provide certainty if rates are rising while the build is underway.

Fixed price contracts protect you from cost blowouts

Lenders require a fixed price building contract because it sets a clear loan amount and removes uncertainty about how much funding you need. If you use a cost plus contract, where you pay the builder's costs plus a margin, the lender cannot confirm the final loan amount and will usually decline the application. The contract must also include a start date, and most lenders require you to commence building within six to twelve months from the contract date. If the builder delays the start beyond that window, you may need to renegotiate or reapply.

You still pay a Progressive Drawing Fee each time funds are released

Each time the lender releases a progress payment, they charge a fee to cover the valuer's inspection and the administrative work involved in processing the drawdown. This fee is usually between $200 and $400 per drawdown. If your contract has six stages, expect to pay that fee six times. Some lenders waive or reduce the fee for construction loans, so it is worth asking before you commit.

Owner builder finance is difficult to secure

If you plan to project manage the build yourself and pay sub-contractors directly, most lenders will not support the loan. Owner builder finance is considered higher risk because there is no registered builder overseeing the project, no fixed price contract, and no clear responsibility if something goes wrong. A small number of specialist lenders offer owner builder loans, but the rates are higher and the deposit requirements are stricter. Unless you have significant construction experience and a strong financial position, you are more likely to get finance approved if you use a registered builder working under a fixed price building contract.

Construction finance for townhouse development involves more documentation, longer approval times, and stricter conditions than a standard home loan. If you are purchasing land with the intent to build multiple dwellings, speak to a broker who works with teachers regularly and understands how lenders assess these applications. The right structure can make the difference between a loan that settles on time and one that falls over at the last stage.

Call one of our team or book an appointment at a time that works for you.

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