Development loans are usually approved on 2-3 year terms, at the end of which the bank expects you to sell your units to pay out the loan facility.

However, you may want to hold on to them a bit longer to sell at a better time in the market.

During a market downturn, selling your residual stock can be almost impossible and lenders very quickly shy away from providing finance, particularly in CBD Brisbane and Melbourne.

Luckily, we may be able to refinance your existing debt to a residual stock loan with a specialist lender.


How much can I borrow?

Typically it’s only private banks that offer this type of so-called take-out finance but we have a couple of non-bank lenders on our panel that can help.

  • Borrow up to 80% of the value of each unit.
  • Borrow up to 100% of the value of each unit using a guarantor.
  • Max loan amount: Loans over $5 million considered on a case by case basis.
  • Max loan term: 1-2 years on an interest only term.
  • Low doc options are available.
  • Bad credit loans are not available.
  • Lenders prefer developments in metro locations.
  • Interest rate: Specialist non-banks charge slightly interest rates but rates are negotiable.

Overall, the more units you want to finance, the lower the Loan to Value Ratio (LVR) you can qualify for.

That’s because funding a large number of units means high exposure, a risk that most lenders don’t want to take on.

Please call us on 1300 889 743 or complete our free assessment form to discover if you qualify for a residual stock loan.


How does the loan work?

Rather than one large loan facility covering all of the residual stock, the lender will actually set up separate for each unit or dwelling.

As you sell each unit, the loan facility is paid out and closed.


Who is this loan for?

Residual stock loans or take-out loans are for professional property developers who have completed a project and want to hold on to some of the remaining units/dwellings rather than sell them as a fire sale just to pay out their development loan.

During periods of market oversupply, offloading your remaining units in a fire sale can be difficult.

Banks don’t have a strong appetite to lend against a block of units with a high vacancy rate.

Luckily, with some specialist lenders, you can refinance your development loan to a short-term take out loan so you can hold onto your residual stock.


Is it a commercial or residential development?

A small number of units on one title (typically up to 4), such as a townhouse, duplex or a boarding house, can actually be financed as a residential loan by splitting the units between different lenders.

This means better loan terms and cheaper interest rates than getting a commercial property loan.

To get a residual stock loan on residential terms you’ll need to have an income source other than income from the property development.

So the lender cannot just rely on income received from rent or revenue from pre-sales.

Residential lenders don’t like lending to property developers in general because they can face significant cash flow constraints.

Is it a commercial project such as the redevelopment of an old retail shop units, a supermarket, new office suite or large block of units?

With a commercial loan, the lender can consider property development income and you can refinance more units in your development.


How do I get approved?

Income

The lender may potentially lend up to 80% of the value of each unit if you can provide your last two years business and personal tax returns or Notices of Assessment (NOA).

One of our lenders can also accept up to 85% of rental income from any of the properties that you’ve already sold as well as other investment properties you may own.

It’s common for self-employed applicants, or people who operate a company via a trust, to not be up-to-date with their financials.

If you cannot prove your income with tax returns, some specialist lenders will accept the following as alternative evidence:

  • An accountant’s letter verifying your income.
  • Business bank statements showing a high turnover.
  • Old tax returns (over 24 months).
  • Interim financial statements.

This is known as a low loc loan and it means your LVR may be restricted, potentially around 60%.

Good character

You need to have a perfect history of paying your debts and bills on time as well as a clean credit file.

The lender will also ask for a borrower repayment declaration as evidence that you’ve been on top of your development loan repayments.

If the project is considered a commercial development, there may be exceptions to this but be aware that you’ll have to pay a higher interest rate and your LVR will be restricted.

Evidence that you’re actively selling

This includes providing evidence that you will be actively marketing the sale of the stock in the near future.

Bear in mind that residual stock loans are approved on a short term, typically 1-2 years.

Reasonable exposure

Our best lender for residual stock loans will assess each case on its merits but they take a common sense approach.

For example, a 10 unit development with 2 pre-sales may be considered.

However, a 40-60 unit development with only 10 pre-sales may be too much of a risk to the lender and your loan could be declined.

Again it’s all case by case so speak to one of our specialist mortgage brokers so we can present a strong case to the right bank.

Location

Because the bank is taking on the exposure of unsold units, they prefer lending against developments in metro locations and large regional areas.

That’s because there’s a better chance that the residual stock can be sold as opposed to projects in rural or regional areas.

Call us on 1300 889 743 or complete our free assessment form to find out if you qualify.


Why would a developer want to hold on to some of the units?

To sell at a better time in the market

Some property developers choose to hold on to some of the stock to sell at a later date, when market conditions are more promising and they can maximise their return on investment (ROI).

Sometimes they simply need more time.

This is common for property developers who are planning to complete more projects in the future.

It’s a good strategy to maintain a strong capital position, particularly when faced with the significant gaps in cash flow between starting construction and eventually generating revenue from the sale.

It may form part of a longer term investment strategy

For example, the developer may find it financially beneficial to rent out the residual stock and take advantage of negative gearing benefits while paying interest only on a take-out loan.

Note, this is just an example and shouldn’t be taken as financial advice.


Development industry insights

Property developers are in a unique position.

Many first-time home buyers have moved away from living in a detached house in the suburbs in favour of owning a townhouse or apartments closer to the CBD.

Such apartments and townhouses suit smaller households, offer an urban lifestyle and help owners avoid the high costs of residential land, according to data from IBISWorld.

However, the research company also found that construction activity in multi-unit apartments and duplexes peaked in 2015-16.

Much of this growth has been driven by Australia’s population growth, a growing preference for high density living in metro areas and capital cities, and exponential foreign investment.

However, industry experts have pointed to a marked oversupply of high density units, with apartment construction at least two times higher than historical norms.

This is particularly true in Brisbane and Melbourne CBD locations.

On top of that, there is a lot of competition from small to medium-scale contracting firms, all the way up to larger operators like LendLease, Mirvac and Australand.


Speak with a mortgage broker

By speaking with the key decision-maker at the lender, you have a much better chance of getting approved for a residual stock loan.

We have strong relationships with a number of specialist lenders and can negotiate a strong deal on your behalf.

Call one of our experienced brokers on 1300 889 743 or tell us a little about your development by completing our online enquiry form.

  • Theresa D

    Hi, can I have a template for a standard accountant’s letter?

  • Hi Theresa,

    You can find a template for an accountant’s letter as well as additional info on it on our accountant’s letter for a bank page:
    https://www.homeloanexperts.com.au/home-loan-documents/accountant-letter/

  • jared

    What are the main docs that I’m allowed to use to prove my income for a low doc loan?

  • The main documents that you can use to verify your income for the low doc loan are:
    – 12 months’ BAS statements showing a high turnover.
    – An accountant’s letter verifying your income.
    – Business bank statements showing a high turnover.
    – Old tax returns (over 24 months).
    – Interim financial statements.

  • roy

    I’m not entirely convinced of using an online mortgage broker. Is it really safe?

  • Hi Roy,
    The online model saves a whole lot of time and is very convenient if you’re unable to meet with a broker face-to-face. However, it can be easy to make the wrong choice in an online broker if you don’t do your homework. We have a page on how you can make sure that you know you’re going with an expert as well as additional info on the matter that you can check out here:
    https://www.homeloanexperts.com.au/about_us/online-mortgage-broker/