Development Finance for Two to Six Townhouses
On a small townhouse project the same headline percentage means three different dollar amounts. Here is which denominator each lender is using.
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Development Finance for Two to Six Townhouses
Three numbers on a small townhouse project all get quoted as the same percentage. Hard cost, total development cost and gross realisation value are three different denominators, and which one the lender lends a share of decides what you have to fund yourself. The same headline percentage against each produces three very different facilities.
Quick Answer
On a small townhouse project the lender is not lending against a single number. It lends a share of a base, and the base it picks decides what you fund yourself. Settle that base, whether cost or gross realisation value, and development finance becomes arithmetic.
Also called: gross realisation value (GRV), total development cost (TDC).
How does funding work for a two to six townhouse project?
Funding a two to six townhouse project works as a staged facility rather than a single advance, and three different numbers get called the same percentage on a small development. The land sits under one part of the facility, the build is released in stages against certified progress, and interest is usually capitalised into the loan rather than paid monthly out of a project that is not yet earning anything.
That structure is why the headline ratio you are quoted tells you very little on its own. Lenders commonly quote a percentage without saying which base it applies to, and the same headline figure produces materially different loan amounts depending on the base, illustrative only. Two funders can offer what sounds like the identical facility and leave you with two quite different amounts to find.
The rest of the moving parts are more predictable. Capitalised interest and a contingency line both sit inside the funded cost, so they consume facility you may have assumed was available for the build itself; contingency is typically a stated percentage of build cost, varies by lender. Your exit strategy, whether that is a sell down or a refinance to a held position, is assessed alongside the build rather than after it. The staged drawdown mechanics are covered in more depth in how development finance works, and the way interest accrues inside the limit is set out in capitalised interest on a development loan.
What changes at the fifth dwelling?
The fifth dwelling is where a small project commonly stops being read on residential criteria and starts being read on commercial ones. Below that line, a two to four dwelling build is often assessed much like an extended construction loan, with your own income and equity position doing most of the work. At five and above the file is usually assessed as a development, and the questions change with it.
What changes is not one rule but a cluster of them. Minimum loan size rises, because development desks are not built for small facilities. A residual project margin test appears, asking whether the finished project clears enough over its cost to absorb a slower market. Presales enter the conversation. The valuation basis moves to an on completion figure, and the ratio is applied to that figure rather than to what you paid for the land. In practice a borrower who sat comfortably inside residential criteria at four dwellings finds the same site assessed against an entirely different set of tests at five.
Bank appetite at this end of development is live policy rather than settled ground, and the current prudential consultation on bank risk weights is worth watching if you are timing a project across the next year.
A prudential consultation opened in June 2026 proposes adjusting the criteria so that more land acquisition, development and construction exposures qualify for the lower 100 per cent risk weight for residential property development. It is a proposal under consultation, not law. Submissions close 7 September 2026 and the proposed commencement is 1 April 2027.
Until any of that lands, non-bank lenders and specialist funders remain the practical route for most projects at this size, which is also why the pricing conversation looks different to a standard purchase. The wider shape of that market sits in the commercial property loan rates guide.
Hard cost, total development cost or gross realisation value: what is the lender actually lending against?
The lender is lending against one of three bases, and establishing which one is the single most useful thing you can do on a first call. Hard cost is the build contract alone. Total development cost adds the land, professional fees, council and authority charges, finance costs and contingency. Gross realisation value is the assessed value of the finished project, commonly net of selling costs and GST depending on the funder.
| Denominator | What it measures | What a typical lender percentage is applied to | What it leaves you to fund |
|---|---|---|---|
| Hard cost | The build contract on its own, excluding land and soft costs. | The construction sum in the signed contract, indicative and varies by lender. | Land, professional fees, authority charges, finance costs and contingency. |
| Total development cost | Every cost of delivering the project, land through to completion. | The full delivered cost, including capitalised interest and contingency, indicative and varies by lender. | The balance of cost above the facility limit, which is your equity. |
| Gross realisation value | The assessed value of the finished project, commonly net of selling costs. | The valuer's on completion figure, not your feasibility figure, indicative and varies by lender. | Whatever cost the resulting limit does not reach, which is often more than the headline suggests. |
Read across those three rows and the point is hard to miss. A ratio applied to hard cost is applied to the smallest of the three numbers, so the facility is smaller and your contribution is larger. A ratio applied to gross realisation value is applied to the largest, which flatters the headline considerably. Most funders also run a second ratio behind the first, so a facility quoted against end value can still be capped by cost. The arithmetic behind both figures is worked through in development finance approval numbers, GRV and TDC.
If you want a read on which base a project like yours is likely to be quoted against before you go any further, check eligibility and we can work backwards from the site.
How much equity do you need to put in, and what counts as equity?
The equity you need is whatever the facility does not cover once every cost sits inside total development cost, which means it is measured as cash to complete rather than as a deposit percentage. Land you already own at an accepted valuation is the most common contribution, and where the land is held cleanly the uplift between what you paid and what it is now worth will usually count toward it.
What counts is narrower than most first time developers expect. Funds drawn against your own home generally count, because the money is still yours at risk, though they change the serviceability picture the funder is looking at and both get assessed together. Third party capital, including mezzanine, sits behind the senior facility and changes the cost of the whole stack; that is a separate conversation and it is covered properly in mezzanine finance for townhouse developers. Where a shorter term gap needs covering against another property, private lending is sometimes the route, at a different cost again.
First time developers are typically asked to contribute more, and the reason is delivery record rather than the quality of the site. Without a completed project to price against, the funder puts that uncertainty into your contribution and into the covenants around the builder. A credentialled builder, a clean land position and a feasibility that survives a valuer's read are what close the gap.
Do you need presales on a small townhouse project?
Presales are not universal on a two to six dwelling project, and at the smaller end a good number of facilities are written without them. Whether they are asked for turns on the funder type, the size of the loan against end value, and how much of the debt the residual project margin can absorb if the market slows while you are building.
Where presales are required, they function as debt cover rather than as a sales target, and qualifying contracts usually need to be unconditional and to arm's length buyers with deposits held properly. Where they are not required, the funder is taking that risk somewhere else, normally in a larger equity contribution or a tighter margin test. Which funders write without presales, and what the trade is, is set out in no presales development finance.
How do you work out your cash to complete?
Cash to complete is total development cost less the facility limit less what you have already put in, and it is the only figure that tells you whether the project can actually be delivered. Build it in that order and the number stops moving on you.
In practice the figure that catches people is not the build contract. It is the soft cost tail: authority charges, service connections, professional fees and the interest accruing while the project sells nothing. Those all sit inside total development cost whether or not the facility funds them, so leaving them out of the feasibility does not remove them from the cheque you write. Working the number the same way each time also makes two offers genuinely comparable, which the headline percentages do not.
What happens if the on-completion valuation lands under the GRV?
If the on completion valuation lands under the gross realisation value you assumed, the facility shrinks, because the ratio is applied to the valuer's figure rather than to yours. On a development file the valuation is a facility constraint rather than a pricing opinion: it sets the ceiling that the percentage is applied to, and everything downstream of that ceiling moves with it.
The shortfall then has to come from somewhere, and there are only three places it can come from. You contribute more equity, you reduce the project so cost falls with the limit, or you go to a funder whose appetite or denominator produces a different answer on the same site. The most common cause is a feasibility built on your own end values rather than on comparable evidence a valuer will accept, which is worth testing before the facility is priced rather than after.
How a lender sets and then applies a ratio is covered more generally in the guide to how commercial property loans work, and the wider lane sits under the property lending hub. The loan to value ratio you are quoted on a completed asset and the ratio you are quoted on a development are not measuring the same thing, which is worth keeping straight when you compare them.
On a two to six townhouse project the same headline percentage can describe three quite different facilities, and every dollar of the difference lands on your side of the ledger. The fifth dwelling is where the assessment changes shape, from a residential style construction read to a development read with a margin test and a presales conversation attached. Establish the denominator first, build total development cost honestly including the soft cost tail, then solve for cash to complete. Do it in that order and two offers become genuinely comparable.
Key takeaway: Ask which base the percentage applies to before you compare two development finance offers.Frequently Asked Questions
Property development loans work as a staged facility rather than a single advance, with a land component drawn at settlement and construction funds released in stages against certified progress. Interest is usually capitalised into the facility rather than paid monthly, because the project earns nothing until it sells or refinances. The limit itself is set as a percentage of a base, and which base the funder uses is what decides your own contribution.
You cannot get 100 per cent development finance in the sense the question usually means, because a facility described as 100 per cent of one base is nowhere near 100 per cent of the delivered cost. A facility covering the whole build contract still leaves the land, the professional fees, the authority charges and the capitalised interest for you to fund. The honest version of the question is what percentage of total development cost is funded, and there is always a contribution.
You can get development finance without presales on a small townhouse project, and at the two to six dwelling end a good number of facilities are written that way. What replaces the presale cover is a stronger equity contribution, a demonstrable residual project margin and an exit strategy the funder believes in. The funder types that write without presales, and what they charge for it, are set out in no presales development finance.
First-time developers are typically asked to contribute more equity than a repeat developer on the same site, and the reason is delivery record rather than the project itself. Without a completed project to price against, the funder prices the delivery risk into your contribution and into the covenants around the builder. Bringing a credentialled builder and a clean land position back closes some of that gap, and the equity options beyond cash are covered in mezzanine finance for townhouse developers.
Lenders want a residual project margin large enough to absorb a slower market before the debt is at risk, and a margin in the mid to high teens as a percentage of cost is a common target, indicative and varies by funder. The margin is tested against the valuer's on completion figure rather than your own end values, which is where most feasibilities lose ground; the gross realisation value entry sets out how that figure is built. If the margin is thin, the usual outcome is a smaller facility rather than a decline.
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