What Not to Overlook When Building Your Dream Home

How Construction Finance Differs from a Standard Home Loan

Construction finance releases funds in stages as your build progresses, not as a lump sum at settlement. You'll only pay interest on the amount drawn down at each stage, which means your repayments start low and increase as more money is released to your builder.

Consider a buyer purchasing suitable land for $350,000 and signing a fixed price building contract for $450,000. At settlement on the land, the lender advances $350,000. The construction loan sits undrawn until the first progress payment is due. After the slab is poured, the builder requests $90,000. The lender conducts a progress inspection, confirms the work is complete, and releases that amount. Your interest charges now apply to $440,000, not the full $800,000 loan amount. This progressive drawdown continues through frame stage, lock-up, fixing, and practical completion.

Most lenders charge a Progressive Drawing Fee for each inspection and drawdown, typically $300 to $500 per progress payment. With four to six drawdowns across a standard build, that's $1,500 to $3,000 in fees that don't exist with a standard purchase. Factor these into your upfront costs alongside the deposit and settlement expenses.

What Lenders Need Before Approving a Construction Loan Application

Lenders require a fixed price building contract with a registered builder before they'll approve construction funding. The contract must specify the total build cost, the progress payment schedule, and a start date. You'll also need council approval for your build, which means your plans have been assessed and stamped by the local council.

In our experience, buyers often assume they can get approval based on land alone and sort the building contract later. That doesn't work with construction finance. The lender needs to see exactly what's being built, who's building it, and how much it will cost before they'll commit. If you're looking at a house and land package, the developer typically arranges the building contract as part of the package, which can streamline the approval process.

For owner builder finance, lenders apply stricter criteria. You'll need to demonstrate building experience, provide detailed costings for materials and sub-contractors, and usually contribute a larger deposit. Most lenders prefer to work with registered builders because the risk is lower and the progress payment schedule is clearly defined.

How Interest Charges Work During Construction

You'll make interest-only repayment options during the construction period, with repayments recalculating after each drawdown. If $440,000 has been drawn and the variable rate is 6.5%, your monthly interest charge is roughly $2,380. After the next drawdown of $100,000, it jumps to $2,925 per month.

Some lenders let you capitalise the interest during construction, which means adding it to the loan balance rather than paying it monthly. That keeps your out-of-pocket costs lower while the build is underway, but it increases the total loan amount once construction finishes and you convert to principal and interest repayments. For first home buyers working with a smaller deposit, capitalising interest can help manage cash flow during the build, but you need to account for the higher balance when the loan converts.

Once practical completion is reached and the builder hands over the keys, the loan converts from construction to a standard home loan. You'll switch from interest-only to principal and interest repayments, and the loan behaves like any other mortgage from that point forward. This is often called a construction to permanent loan because it transitions automatically without needing to refinance.

What Happens If Your Build Goes Over Budget

Fixed price building contracts protect you from cost overruns, but they don't cover variations you request after signing. If you decide to upgrade the kitchen, add a second bathroom, or change the flooring, the builder will issue a variation and the cost increases. The lender won't automatically fund variations unless you've applied for additional borrowing.

In a scenario like this, a buyer signs a contract for $450,000 but requests $30,000 in variations halfway through the build. The builder adjusts the contract price to $480,000 and updates the progress payment schedule. The buyer needs to either pay the variation costs in cash or apply to increase the loan. If borrowing capacity allows, the lender may approve the increase. If not, the buyer has to fund the variation personally or remove it from the build. Always confirm what variations will cost and whether you can borrow more before committing.

Cost plus contracts work differently. The builder charges for materials and labour as the build progresses, plus a margin. The final cost isn't fixed, which makes lenders cautious. If you're using a cost plus contract, expect the lender to apply a buffer and possibly require a larger deposit to account for the uncertainty.

The Timeline from Land Purchase to Moving In

Most construction loan applications require you to commence building within a set period from the Disclosure Date, typically six to twelve months. If you purchase land but don't start construction within that window, the lender may withdraw the construction funding approval and you'll need to reapply.

From contract signing to practical completion, a standard project home loan build takes around six to nine months, depending on weather, materials availability, and how quickly the builder moves through each stage. Custom design builds often take longer because there are more variables and less repetition for the builder. If you're working with low deposit home loans or a guarantor, the lender may want to see the build start sooner to reduce their risk exposure on the land-only component.

Buyers sometimes underestimate how long council plans take to approve. In growth corridors around Melbourne, development application timeframes can stretch to several months if the design requires adjustments or if the council requests additional information. Build that time into your planning, particularly if you're renting and trying to time your move.

Why Your Deposit Needs to Cover Both Land and Construction

Lenders calculate your deposit against the total project cost, not just the land. If you're borrowing 90% on a land and construction package valued at $800,000, you'll need a 10% deposit of $80,000 plus settlement costs. Some of that deposit is paid at land settlement, and the rest sits as equity in the project to cover the gap between what you're borrowing and the total cost.

For buyers using the Home Guarantee Scheme, the deposit requirement drops to 5%, but the same principle applies. Your genuine savings need to cover the percentage of the total project value, and lenders still expect you to demonstrate you can service the loan once construction is complete and repayments switch to principal and interest. If you're considering a guarantor loan, the guarantor's property can cover the deposit shortfall, but the guarantee usually stays in place until you've built enough equity to remove it, which might take a few years after the build finishes.

How to Choose Between a Package and a Custom Build

House and land packages offer fixed pricing, shorter build times, and fewer decisions to make. The developer has already selected the land, designed the home, and locked in the builder. For first home buyers, that certainty makes budgeting and loan approval more predictable. The trade-off is less flexibility in design and location.

Custom builds let you choose your own land, design the floor plan, and select finishes. That control comes with more complexity. You'll need to engage an architect or draftsperson, manage council approval, and work through the quoting process with builders. Construction loan interest rate pricing can be slightly higher for custom builds because lenders view them as higher risk compared to volume builders working from standard plans.

If you're building in an established suburb closer to Melbourne's centre, you'll likely be buying land separately and going custom. If you're looking at growth areas in the outer east or southeast, packages dominate the market and often represent better value for the level of finish you'll get.

What to Confirm Before Signing the Building Contract

Read the progress payment schedule carefully and make sure it aligns with what your lender has approved. Some builders front-load payments, asking for a larger deposit or first progress payment than the value of work completed at that stage. Lenders release funds based on work completed, so if there's a mismatch, you'll need to cover the gap yourself.

Confirm who pays for soil tests, engineering reports, and other pre-construction requirements. These can add several thousand dollars to your upfront costs, and not all builders include them in the fixed price contract. Check what's classified as a standard inclusion and what counts as an upgrade. A builder might advertise a certain price, but that's often based on the most minimal specification. Upgrading to the finishes shown in the display home can add $20,000 to $50,000 depending on the size of the build.

Make sure the contract specifies a timeframe for practical completion and what happens if the builder runs over. Some contracts include liquidated damages clauses, which compensate you for delays. Others don't, leaving you paying rent longer than planned with no recourse.

The Call to Action

Construction finance involves more moving parts than a standard home loan, and timing matters. Getting your loan structure right from the start, understanding what each drawdown will trigger, and budgeting for the fees and interest during the build makes the process far less stressful. Call one of our team or book an appointment at a time that works for you, and we'll walk through your specific build scenario and what lenders will require.

Frequently Asked Questions