When to Use a Construction Loan for Your Build

A construction loan releases funds progressively as your build reaches specific milestones, rather than handing over the full amount upfront.

You're charged interest only on what's been drawn down at each stage, which means your repayments start lower and increase as more of the loan is accessed. Most lenders require a registered builder, council approval, and a fixed price building contract before they'll proceed. For couples building together, understanding how the progressive drawdown works removes a lot of uncertainty around cash flow and timing.

How Construction Finance Differs From a Standard Home Loan

With a standard home loan, you borrow a set amount and begin repaying principal and interest immediately. Construction finance is released in stages tied to your progress payment schedule, typically four to six draws covering base, frame, lockup, fixing, and completion.

Consider a couple purchasing suitable land in Glen Waverley for a house and land package. The land component settles first using a portion of the approved loan. Once council plans are approved and the registered builder is ready to start, the first construction draw covers the slab and base. At frame stage, the second payment is released. Each release follows a progress inspection arranged by the lender, confirming that the work matches the stage being claimed. This structure protects both you and the bank, as funds are only released when the physical work is verified.

The loan converts to a standard principal and interest home loan once the build is complete and you've received your occupancy certificate. Some lenders offer a construction to permanent loan, which means you only go through one application and settlement process for both phases.

What You'll Need Before Applying for Construction Funding

Lenders assess construction loan applications based on your deposit, income, the builder's credentials, and the project's feasibility.

You'll need a fixed price building contract from a registered builder with appropriate insurance, council approval or at least evidence that the development application is progressing, detailed plans, a progress payment schedule, and proof that you can service the loan once it converts to full repayments. Most lenders require a deposit of at least 10%, though some will accept 5% if you qualify under the Home Guarantee Scheme or are willing to pay lenders mortgage insurance.

If you're planning a renovation rather than a new build, a house renovation loan follows a similar structure but may require a valuation showing that the improved property will be worth more than the combined land and construction costs. Owner builder finance exists but is harder to access, typically requiring a larger deposit and evidence of building experience, as lenders view self-managed projects as higher risk.

Interest Rates and Fees During the Construction Period

Construction loan interest rates are usually comparable to standard variable rates, though some lenders charge a slight premium during the building phase.

You'll also encounter a Progressive Drawing Fee, typically between $200 and $500 per drawdown, covering the cost of the progress inspection and administration. If you're building in stages over an extended period, these fees add up, so it's worth clarifying the total number of expected draws with your builder before you commit.

During construction, most lenders offer interest-only repayment options, which keeps your repayments lower while the loan balance is still climbing. Once the build is complete and the loan converts, you can choose to stay on interest-only if your circumstances suit it or switch to principal and interest repayments. The flexibility depends on your lender and loan structure, so it's worth discussing your plans with a broker who understands how different lenders treat the transition.

Timing and Conditions You Need to Understand

Most construction loans require you to commence building within a set period from the Disclosure Date, usually six to twelve months.

If your project stalls due to builder delays, weather, or permit issues, you may need to apply for an extension or risk the loan offer lapsing. Lenders also set a maximum construction period, often twelve months for a standard residential build. If your project runs over, you may need to negotiate an extension or refinance, which can complicate your timeline and increase costs.

In our experience, couples underestimate how long council approval and final permits can take. A development application lodged in Melbourne's inner east might take three to four months to be assessed, and if there are objections or additional requirements, that timeline extends. Factor in buffer time when you're planning your build start date, particularly if you're selling an existing property to fund part of the project.

How the Progressive Drawdown Schedule Works in Practice

The progress payment schedule is agreed between you and your builder, then submitted to the lender as part of the application.

A typical schedule might allocate 10% at base stage, 15% at frame, 35% at lockup, 35% at fixing, and the final 5% at practical completion. The builder invoices you at each stage, you notify the lender, they arrange a progress inspection, and if everything aligns, the funds are released directly to the builder or into your account to pay sub-contractors, depending on how the contract is structured. The inspection usually happens within a few days, though delays can occur if the inspector's schedule is full or if there's a query about the stage reached.

As an example, a couple building a custom design in Mount Waverley with a contract value of $450,000 would see roughly $45,000 released at base stage, $67,500 at frame, and so on. At each release, the loan balance increases and so does the interest charged. By lockup stage, around 60% of the loan is drawn and interest is accruing on that portion, not the full amount. Understanding this flow helps you plan for the rising cost of holding the loan during construction, particularly if settlement on your land happened months earlier and you've been paying interest on that portion since day one.

When a Land and Construction Package Simplifies the Process

A land and construction package bundles the land purchase and build under a single contract, often offered by project home builders or developers with access to new estates.

The advantage is that the builder, the land seller, and sometimes the lender have worked together before, which can speed up approval and reduce the chance of surprises. The lender assesses the entire package as one transaction, and the loan structure is tailored to release funds in line with the builder's schedule. For first home buyers who want certainty and less complexity, this can be a practical path, particularly if you're accessing government schemes that favour new builds.

The trade-off is less flexibility in design and choice of builder. If you're set on a custom home or a specific block of land, you'll need to structure the land purchase and construction loan separately, which is entirely workable but requires more coordination between your conveyancer, builder, and broker.

Switching From Interest-Only to Principal and Interest Repayments

Once your build is complete and you've moved in, the loan converts from construction mode to a standard home loan.

At this point, you'll typically switch from interest-only to principal and interest repayments, which means your repayment amount will jump. If your loan amount is $500,000 and you were paying interest only during construction at around 6.5%, your monthly repayment might have been roughly $2,700. Once you switch to principal and interest over a 30-year term at the same rate, that repayment rises to around $3,160. The increase isn't dramatic, but it's something to budget for, particularly if your income or expenses have shifted during the build period.

Some lenders allow you to lock in a portion of the loan at a fixed rate once construction is complete, which can provide certainty if you're concerned about rate movements. Others offer the option to make additional payments without penalty, which helps you pay down the balance sooner if your circumstances allow. The terms vary significantly between lenders, so it's worth mapping out your preferences with a broker before you commit to a particular construction loan product.

Call one of our team or book an appointment at a time that works for you to talk through your build plans and confirm which lenders offer the most suitable terms for your situation.

Frequently Asked Questions