The Victorian Government has paved the way for a large residential development on the former Amcor paper mill site in Melbourne's inner-north.

Amcor vacated the Alphington site last year and yesterday announced it had been sold for $120 million.

Planning Minister Matthew Guy says it will be a sustainable development of 1,500 townhouses and apartments that will not hurt the Yarra River.

"The vast majority of the site will be low-rise and it will be done certainly in a way that is respectful to the Yarra River," Mr Guy said.

"It will have to factor in the government's important Yarra River setbacks so that development can't be built right up to the Yarra River."

Mr Guy has also paved the way for a 14-storey development on the corner of of Heidelberg Road and the Chandler Highway, which is above the eight storeys recommended by the council.

But overall he says, the development will be low rise.

"That's only an indicative height. It may be smaller than that," Mr Guy said.

"I believe the best thing I can do is provide a level of flexibility so that the vast majority of the site is indeed low rise."

The plans include community facilities and a child care centre, but not a primary school.

Yarra Mayor Jackie Fristacky says it is vital that a school is built otherwise families will miss out.

"There's demand for a new school and that should be part of the overall planning framework, to ensure the infrastructure is there to meet the needs of the new residences," she said.