Top tips to finance land for house construction

How construction loans work when you buy land first

A construction loan lets you purchase land and then fund the build progressively as work happens. Instead of receiving one lump sum like a standard home loan, the lender releases funds in stages as your builder completes specific milestones, and you only pay interest on what's been drawn down so far.

Consider someone on a single income who finds suitable land in Pakenham. They secure finance to purchase the block outright, then the same loan switches to a progressive drawdown structure once the building contract is signed. The lender might release 10% at slab stage, another 20% when the frame goes up, and so on until the house is complete. During construction, repayments cover interest only on the amount drawn down, which keeps costs manageable while there's no rental income and no place to live yet.

Most lenders require you to commence building within a set period from the disclosure date, usually 12 to 18 months. If you take too long to start, you may need to reapply or extend the approval, which can mean reassessing your income and deposit all over again. That timeline matters when you're arranging council approval, finalising plans, and coordinating a registered builder.

What lenders look for in a land and construction package

Lenders assess your income, deposit, and the total cost of land plus build combined. You'll typically need a deposit of at least 10% of the combined land and construction cost, though some lenders will consider 5% if you're eligible for a government guarantee or prepared to pay lenders mortgage insurance.

Your income needs to service the full loan amount from the start, even though you're only drawing down progressively. That means a single income needs to demonstrate it can cover the eventual principal and interest repayments once construction finishes and the loan converts to a standard home loan. Lenders also want to see a fixed price building contract with a registered builder, not a cost plus arrangement, because cost plus contracts carry too much uncertainty around the final loan amount.

In our experience, first home buyers often underestimate how much lenders scrutinise the building contract itself. The contract needs to show a clear progress payment schedule, itemised stages, and a realistic completion timeframe. If the build is expected to take 18 months but the contract suggests six, that raises questions about whether the builder is credible or the budget is accurate.

The progressive drawdown and how interest works during the build

Once construction starts, your lender releases funds according to a progressive payment schedule tied to building milestones. Each time the builder completes a stage, they request a progress payment. The lender arranges a progress inspection to confirm the work is done, then releases the next portion of funds directly to the builder.

You only pay interest on the amount drawn down so far, not the full loan. That keeps repayments lower during construction, but you'll also pay a progressive drawing fee each time funds are released, typically between $300 and $500 per drawdown depending on the lender. Over a build with five or six stages, those fees add up, but they're still a smaller impost than paying interest on the full loan amount from day one.

Some lenders also cap the number of drawdowns they'll allow, usually five or six. If your builder wants to break the contract into more stages than that, you may need to negotiate or consolidate payments. That's worth confirming with your broker before you sign anything, because changing the payment schedule midway through can delay the build and cost you more in interest and holding costs.

Council approval and how it affects your construction loan application

Your lender will want to see that the land is suitable for the type of home you're planning to build. That usually means confirming that a development application has been submitted or that council plans are already approved. Some lenders will provide conditional approval before plans are finalised, but they won't release funds for construction until council approval is confirmed.

If you're building in a growth corridor like Clyde North or Wyndham Vale, council approval can take several months depending on the complexity of the design and local planning overlays. Delays at this stage don't just push back your build, they can also eat into the validity period of your loan approval. Most approvals last three to six months, and if you can't start construction within that window, you may need to reapply under whatever lending criteria and interest rates apply at that time.

It's also worth noting that some lenders have restrictions on certain land types. If the block is on a bushfire overlay, flood zone, or has easements that limit where you can build, not all lenders will proceed. Checking this with a broker before you commit to the land purchase can save you from signing a contract you can't finance. If you're also considering an existing home, the differences in how lenders assess land versus established property are covered in more detail under construction loans.

Fixed price contracts and why lenders won't accept cost plus

Lenders require a fixed price building contract because it caps the amount they'll need to lend. A cost plus contract, where the builder charges materials at cost and adds a margin, leaves the final amount open, and most mainstream lenders won't touch it.

A fixed price contract protects you and the lender. It sets out exactly what's being built, the total price, and the progress payment schedule. If the builder underquotes or runs into cost blowouts, that's their problem to manage, not yours. The contract should also specify a completion date and include clauses around delays and variations.

Variations are where things get complicated. If you decide midway through the build that you want stone benchtops instead of laminate, or you want to move a window, the builder will issue a variation. Small variations can usually be paid out of pocket, but if they're large enough to push the total build cost beyond what the lender approved, you'll need to apply for additional funds. That's not always possible on a single income if your borrowing capacity is already stretched, so it's worth being conservative with changes once construction starts.

How to structure your deposit when land and build are separate contracts

When you're buying land and building separately, you'll have two contracts: one for the land purchase and one for the build. Your deposit needs to cover the land contract first, and then the lender will include the build cost in the overall loan, releasing those funds progressively.

As an example, if the land costs $250,000 and the build costs $400,000, the total project is $650,000. A 10% deposit means you need $65,000 in genuine savings or gifted funds. That $65,000 typically goes toward the land purchase and associated settlement costs like conveyancing and stamp duty. The build cost is then drawn down progressively as construction proceeds.

Some buyers assume they can settle the land with a smaller deposit and top up later before construction starts, but that's not how construction finance works. The lender assesses the full land and build package upfront, and your deposit needs to meet their requirements for the combined amount. If you're using the First Home Guarantee or another government scheme, the deposit requirement may drop to 5%, but the same principle applies: the deposit is calculated against the total project cost, not just the land.

What happens once construction finishes

Once the build is complete and you've received a certificate of occupancy, the loan converts from a construction loan to a standard home loan. Your repayments switch from interest only on the drawn amount to principal and interest on the full loan, and the interest rate may also change depending on whether you locked in a fixed rate or stayed variable during construction.

That shift in repayments can be significant. If you were paying interest only on an average drawn balance of $300,000 during the build, your repayments might jump by several hundred dollars a month once the loan converts and you're paying principal and interest on the full $650,000. Lenders assess your ability to meet those higher repayments at the application stage, but it's still worth building a buffer into your budget so you're not caught short when the switch happens.

You'll also need to organise a final valuation. The lender will want to confirm that the completed property is worth what they've lent you. If the valuation comes in under the loan amount, that can create issues, especially if you're planning to refinance or release equity down the track. Most lenders build in a small buffer when they assess land and construction packages, but if the build quality or finish is poor, or if the market has shifted during construction, the valuation might not stack up.

Call one of our team or book an appointment at a time that works for you. We'll walk through your income, deposit, and build plans to make sure the structure fits and the numbers hold up from day one.

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