The area was first taken up for agriculture around 1911. In 1913 a school was established and named Lake Grace after the nearby lake. In 1914 the government planned to extend the railway network from Kukerin to Lake Grace, and local settlers lobbied for a townsite to be declared at the terminus. The railway was completed on 25 November 1916, and terminated close to the site of the existing school. The townsite of Lake Grace was gazetted later in 1916. The branch railway was extended to the ultimate terminus at Newdegate on 15 February 1926 and a further branch from Lake Grace to Hyden opened on 5 April 1933, making Lake Grace a junction and therefore of some importance for train working operations.