Unlock the secrets to funding your building project

Building a new home with a small deposit sounds like it might be out of reach, but construction finance works differently to a standard home loan.

You're not borrowing the full amount upfront. Instead, the lender releases funds in stages as your builder completes each phase of the project. That changes how much you need saved, how interest is charged, and what your repayments look like during the build.

How Construction Loans Release Funds in Stages

A construction loan releases money progressively as your builder hits key milestones. The lender only charges interest on the amount drawn down so far, not the full loan amount. If your total loan is approved for a certain amount but only the slab has been poured, you're only paying interest on that first progress payment.

Consider a first home buyer in Mulgrave working with a registered builder on a house and land package. The lender approves the loan, but the funds sit in a construction account. When the slab is complete and the builder submits a progress claim, the lender arranges a progress inspection. Once the work is verified, the first drawdown is released to the builder. The buyer's repayments increase slightly because there's now more borrowed, but they're still only covering interest on what's been drawn.

This progressive drawdown structure means your deposit needs to cover the land plus enough to satisfy the lender's loan-to-value ratio once the build is finished. Some lenders will assess the end value of the completed home, not just the land, which can help buyers with a smaller deposit get into a project they'd otherwise miss.

What a Progress Payment Schedule Looks Like

Most construction loans follow a progress payment schedule tied to building stages. Typical stages include base, frame, lock-up, fixing, and completion. Each stage triggers a drawdown once the work is verified.

Your builder provides the schedule upfront, usually as part of a fixed price building contract. The lender reviews it during the construction loan application and sets out when funds will be released. Between each stage, you're making interest-only repayment options on what's been drawn so far. Once the build is complete and you've received council approval for occupancy, the loan converts to a standard principal and interest home loan, often called a construction to permanent loan.

In our experience, buyers underestimate how long the approval process takes when council plans and a development application are involved. If you're looking at suitable land that doesn't have all approvals in place yet, factor in several months before you can commence building within a set period from the Disclosure Date. Lenders won't release funds until those approvals are confirmed.

How Interest Charges Work During the Build

You're only paying interest on what's been drawn down, but that amount grows with each progress payment. Most lenders offer interest-only repayment options during construction, which keeps your repayments lower while the build is underway. Once the home is finished, the loan switches to principal and interest unless you've arranged otherwise.

Some lenders charge a Progressive Drawing Fee each time they release funds. It's usually a few hundred dollars per drawdown, and it covers the cost of the progress inspection and administration. If your build has five stages, expect to pay that fee five times. It's not huge, but it adds up and should be in your budget from the start.

The construction loan interest rate is often slightly higher than a standard variable rate, though some lenders offer the same rate if you're moving to a construction to permanent loan with them. Rates vary depending on your deposit size, the lender's appetite for construction finance, and whether you're using owner builder finance or working with a registered builder.

What Lenders Look for in a Construction Loan Application

Lenders want to see a fixed price building contract with a registered builder, council plans that are approved or very close, and enough deposit to meet their lending criteria. If you're using land and construction package finance, some lenders will assess the combined value of the land and the finished home, which can work in your favour if you're buying in an area where the completed property will be worth more than the sum of its parts.

For first home buyers with a small deposit, the Home Guarantee Scheme can be useful if you're building. The scheme lets eligible buyers build with as little as a 5% deposit without paying lenders mortgage insurance, as long as the build meets the scheme's price caps and the builder is registered. Not all lenders participate, so it's worth checking who can access Construction Loan options from banks and lenders across Australia under the scheme before you settle on a builder.

Lenders also want to know you can service the loan once it's fully drawn. They'll assess your income against the final loan amount, not just the interest-only repayments during construction. If your income is variable or you're self-employed, you'll need to show at least two years of financials in most cases.

Fixed Price Contracts Versus Cost Plus Arrangements

Most lenders will only approve construction finance if you have a fixed price building contract. That's a contract where the builder agrees to complete the home for a set price, and any cost overruns are their problem, not yours. It protects you and gives the lender certainty about how much they're lending.

A cost plus contract is where the builder charges you for materials and labour as they go, plus a margin. It's common with custom builds or renovations, but most mainstream lenders won't touch it because the final cost is unknown. If you're going down that path, you'll likely need a specialist lender or private funding, and the rates will be higher.

For first home buyers, sticking with a fixed price contract and a volume builder makes the approval process much smoother. You'll have a clear Progressive Payment Schedule, the lender knows exactly what they're funding, and you're not exposed to unexpected cost blowouts halfway through the build.

How Long the Build Takes and What That Means for You

Construction timelines vary, but most project home builds take between six and twelve months once the slab goes down. During that time, you're paying interest on the drawn amount and possibly rent elsewhere if you haven't sold an existing property. That double cost can stretch your budget, so it's worth running the numbers before you commit.

If you're building in an area like Glen Waverley or Mount Waverley where land supply is tighter, expect council approval and site prep to add months to the timeline. Delays with plumbers, electricians, or materials can push things out further. Lenders understand this, but they'll want to see a realistic timeline in your construction loan application and they may set conditions around how long the approval stays valid.

Some buyers assume they can pause the build if cash flow gets tight, but that's rarely an option once you've started. Builders expect progress payments on time, and lenders won't release funds unless the work is done. If you're genuinely unsure whether you can sustain the repayments during the build, it's worth speaking to a mortgage broker who can model out the cashflow across each stage.

Why Building Might Still Work with a Small Deposit

Building a home from scratch can sometimes get you into a better property than buying established, especially if you're willing to look at land in growth areas on Melbourne's fringe or regional Victoria. The combination of a low deposit home loan and careful selection of land and construction package options means you're not competing with cashed-up buyers in the inner suburbs.

Because lenders assess the end value, you might be able to borrow more than you would for an equivalent established home. If the land costs less but the completed home is valued higher, the loan-to-value ratio works in your favour. That's especially true if you're building a quality construction home in an area where new builds are in demand.

You'll still need genuine savings for your deposit, and you'll need to budget for the period where you're paying interest during construction. But if the numbers work and you're prepared for the timeline, building with a small deposit is absolutely within reach for first home buyers who know how construction funding actually operates.

If you're weighing up whether to build or buy established, call one of our team or book an appointment at a time that works for you. We'll walk through your deposit, your borrowing capacity, and whether construction finance or a standard home loan makes sense for where you're at right now.

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