Top Mistakes to Avoid When Applying for a Property Development Loan
Property development can be a profitable venture but comes with significant risks. Whether you are an experienced developer or just starting, securing the right loan for your project is crucial. Many developers make common mistakes when applying for property development finance, which can impact their project's success. Avoiding these mistakes can help keep your project on track, within budget, and aligned with your timeline.
1. Using Purchaser Deposits as Equity
Some developers attempt to use deposits from off-plan sales as equity in their projects. While this may seem like an easy way to secure funds, most lenders in New Zealand strongly discourage this practice. Purchasers who have paid deposits are entitled to refunds if the project does not meet expectations or is delayed. If those deposits have already been spent elsewhere, both developers and lenders face significant financial and reputational risks.
When applying for development finance, lenders typically expect developers to contribute at least 20% of the total project cost as equity. If you rely too heavily on purchaser deposits, lenders may see this as a sign of financial strain, making it harder to secure favourable loan terms.
2. Overlooking GST in Your Feasibility Study
Failing to properly account for Goods and Services Tax (GST) is a common mistake among New Zealand developers. Many developers either include GST in their cost and revenue projections incorrectly or fail to account for it at all, leading to inaccurate financial calculations.
When preparing your feasibility study, ensure that all figures are correctly adjusted for GST. If you are developing properties for sale, your revenue will likely include GST, and your expenses may also be subject to GST. Incorrect treatment of GST can make a project appear more profitable than it actually is, leading to shortfalls in funding. Additionally, consider finance costs—such as interest and fees—when calculating your total expenditure.
3. Not Fully Understanding Your Loan Terms
It’s essential to carefully read and understand your loan agreement before signing. Many developers focus solely on the interest rate, overlooking other critical costs such as establishment fees, line fees, and repayment structures.
In New Zealand, some property development loans include line fees, which are charged on the total loan limit regardless of whether all funds are used. Establishment fees can also add up quickly. Instead of comparing loans based only on interest rates, evaluate the full cost structure, including any penalties for early repayment or delays.
4. Underestimating the Total Costs of Development
Budgeting accurately is a key factor in a successful property development project. Many developers underestimate costs, particularly those associated with legal fees, marketing, financing, and potential project delays.
Failing to include a contingency buffer in your budget is a major risk. Unforeseen expenses can quickly lead to financial strain, project delays, and issues with cash flow. A well-prepared budget should include at least a 10-15% contingency to cover unexpected costs.
5. Choosing the Wrong Lender or Loan Structure
Not all lenders specialise in development finance. Choosing a lender who lacks experience in property development can lead to unfavourable loan terms and unnecessary complications.
In Christchurch and throughout New Zealand, mortgage brokers can help identify the best loan structures for your specific project. Consider options such as staged drawdowns, flexible repayment schedules, and interest-only periods to better align with your cash flow needs.
6. Ignoring the Importance of Insurance
Property development involves substantial financial risk, and having adequate insurance coverage is critical. Many developers fail to secure the right insurance policies, leaving them vulnerable to unexpected costs.
Essential insurance policies for New Zealand developers include:
- Contract Works Insurance – Covers damage to the project during construction.
- Public Liability Insurance – Protects against third-party claims.
- Professional Indemnity Insurance – Covers design and project management risks.
- Workers’ Compensation Insurance – Ensures coverage for employee injuries on-site.
Lenders will often require proof of insurance before approving a development loan, so securing the right policies early is advisable.
7. Not Having a Strong Team or Seeking Expert Advice
Property development is complex, and having the right team of professionals can make a significant difference. Many developers underestimate the value of expert advice, leading to costly mistakes and delays.
Ensure you have a solid team that includes:
- An accountant familiar with property development and tax laws.
- A property lawyer to review contracts and compliance requirements.
- An experienced architect and project manager to oversee design and construction.
Seeking expert advice early can help you avoid pitfalls and keep your project on track.
Final Thoughts
Securing property development finance in New Zealand is a key milestone, but avoiding common mistakes is just as important. By properly accounting for costs, selecting the right lender, and working with expert advisors, you can set your project up for success. Careful planning and sound financial management will improve your chances of delivering a profitable and well-executed development.
