Modular Construction Finance: How Developer Loans Work

Financing modular construction differs from traditional builds. The factory manufacturing process doesn’t fit conventional construction loan structures, which release funds based on on site progress. Understanding how modular finance works is essential for successful project delivery.

Why Modular Finance is Different

Traditional Construction Finance Model

Conventional construction loans work on a progress payment basis:

Foundation complete → 15% released
Frame complete → 25% released
Lock up stage → 25% released
Fit out complete → 25% released
Practical completion → 10% released

Banks send valuers to site at each stage, confirming physical progress before releasing funds.

The Modular Challenge

With modular construction, 70-80% of building happens in a factory. When a bank valuer visits your site during manufacturing, they see an empty block, even though significant value is being created elsewhere.

The disconnect:

Factory work represents real value
Site shows no visible progress
Traditional loan structures can’t accommodate this

Modular Finance Solutions

Option 1: Modular-Specific Construction Loans

Some lenders now offer construction loans designed for off site manufacturing:

How They Work:

Progress payments tied to factory milestones
Site inspections replaced by factory inspections
Funds released based on manufacturing progress

Key Features:

Factory commencement payment (typically 20-30%)
Mid manufacturing milestone payment
Completion/transport payment
Site installation and finishing payments

Considerations:

Limited lender options (specialist market)
May require builder pre approval from lender
Documentation requirements can be extensive

Option 2: Development Finance

For multi dwelling LMR projects, development finance offers a complete funding solution:

What’s Covered:

Land acquisition
Pre construction costs (approvals, professional fees)
Construction costs (factory and site)
Holding costs and interest

Structure:

Interest only during development
Principal repayment from sales or refinance
Typically 12-24 month terms

LVR (Loan to Value Ratio):

65-75% of end value (GRV)
80-90% of costs
Presales may be required for higher LVRs

Option 3: Hybrid Structures

Combining finance products can optimise costs and flexibility:

Example Structure:

Bank land loan: 70% of land value
Modular finance: 80% of construction cost
Equity contribution: Balance

Benefits:

Lower overall interest cost
Flexibility in draw timing
Multiple lender competition

Option 4: Alternative Finance

Non bank options for specific situations:

Private Lending:

Higher rates but faster approval
Less documentation required
Flexible structures available

Asset Finance:

Some factory components financed as assets
Off balance sheet options
Shorter terms

What Lenders Require

Project Viability

Feasibility Analysis:

Total project cost breakdown
End value assessment (independent valuation)
Profit margin analysis (typically 15-20% minimum)
Cash flow projections

Market Evidence:

Comparable sales data
Rental yield evidence (for investment projects)
Local market conditions

Builder/Developer Assessment

Builder Requirements:

Financial capacity (typically via accountant’s certificate)
Track record of similar projects
Fixed price contracts
Appropriate insurance coverage
Manufacturer accreditation (for modular)

Developer/Borrower Requirements:

Personal financial position
Development experience
Equity contribution capacity
Serviceability (ability to meet interest payments)

Security Requirements

What Lenders Take Security Over:

The development site (registered mortgage)
Personal guarantees from directors/principals
Sometimes: other property cross collateralisation

What Affects Valuations:

Development approval status
Construction contract terms
Builder selection
Market conditions

The Finance Process Timeline

Pre-Application (2-4 weeks)

What to Prepare:

Project feasibility including all costs
Site information and approvals status
Builder quotes and contracts
Personal financial statements
Company financials (if applicable)

Application & Assessment (2-4 weeks)

Lender Due Diligence:

Credit assessment
Project review
Valuation ordering
Builder vetting
Legal document review

Approval & Documentation (2-3 weeks)

After Conditional Approval:

Formal approval subject to conditions
Legal documentation preparation
Conditions satisfaction
Settlement/first draw

During Construction (6-9 months)

Ongoing Requirements:

Progress claims with evidence
Insurance maintenance
Compliance with loan conditions
Interest payment (usually capitalised)

Cost of Modular Finance

Interest Rates (2025 Indicative)

Product	Rate Range	Notes
Bank Development Finance	7.0-9.0%	Best rates, stricter criteria
Non-Bank Development	9.0-12.0%	Faster, more flexible
Modular-Specific	8.0-10.0%	Specialised understanding
Private/Bridging	12.0-18.0%	Short term, specific purposes

Fee Structure (Typical)

Establishment Fees: 0.5-2.0% of facility Line Fees: 0.5-1.0% per annum on undrawn funds Valuation Costs: $3,000-10,000 depending on complexity Legal Costs: $5,000-15,000 (borrower pays lender’s costs) Exit Fees: Usually nil, some products have early repayment fees

Interest Cost Example

$1.5M Construction Finance, 8 months average draw:

Traditional Construction (8 months at 8%):

Average balance: $1.0M
Interest cost: ~$53,000

Modular Construction (5 months at 8%):

Average balance: $1.0M
Interest cost: ~$33,000
Saving: ~$20,000

Modular’s faster timeline directly reduces interest costs.

Working with Specialist Lenders

Why Specialist Lenders Matter

Mainstream banks often struggle with modular construction because:

Their systems expect on site progress
Valuers don’t inspect factories
Processes aren’t designed for off site manufacturing

Specialist lenders understand:

Factory inspection protocols
Manufacturing milestone verification
Modular specific risk factors
Appropriate valuation approaches

Abacus Property Finance

As part of the Iconic Centre M-I-A framework, Abacus provides development finance specifically structured for modular construction:

Modular Expertise:

Factory progress payment structures
Understanding of manufacturing timelines
Valuation processes suited to modular
Experience with Pattern Book developments

Benefits:

Pre approved facility structures for common project types
Faster assessment with familiar builder arrangements
Integrated with Iconic Centre project management

Finance Checklist

Before Approaching Lenders

Have Ready:

Site ownership evidence or purchase contract
Development approval (CDC or DA) or clear pathway
Fixed price construction contract
Detailed feasibility with professional costings
Personal financial statements (last 2 years)
Tax returns (last 2 years)
Asset and liability statement

For Companies:

Company financials (last 2 years audited or reviewed)
Director guarantees
Company structure documentation

What Strengthens Applications

Project Factors:

Development approval already obtained
Fixed price construction contract signed
Strong project margin (20%+ preferred)
Pre sales or pre commitments

Personal Factors:

Development track record
Strong personal financial position
Low personal gearing
Cash equity contribution (not all borrowed)

Frequently Asked Questions

Can I use my home as security for development finance?

Most lenders accept residential property as security. However, this exposes your home to development risk. Consider the implications carefully and seek independent financial advice.

Do I need development experience to get finance?

Not necessarily, but inexperience increases lender scrutiny. Working with experienced project managers (like Iconic Centre) mitigates lender concerns about first time developer risk.

Can I finance land purchase and construction together?

Yes, development finance typically covers both. You can also purchase land separately and seek construction only finance, which may offer more competitive rates.

What happens if the project runs over time?

Most development facilities include contingency provisions. Extensions are usually available but may incur fees. Modular’s predictable timelines reduce this risk significantly.

How does LMR/CDC approval affect finance?

The 10 day CDC pathway reduces approval risk and timeline, both of which lenders value. LMR eligible projects often receive more favourable terms due to reduced planning risk.

Get Finance-Ready

Understanding your finance options before committing to a project is essential. Our feasibility assessment includes indicative finance structuring based on your specific circumstances.

Request a feasibility assessment to understand your development finance options.