Construction loan

A construction loan is a home loan designed for building a new property. Instead of receiving the full loan amount at once, funds are released in stages through progressive drawdown as your builder completes each phase of construction. You pay interest only on the funds drawn so far, not the full amount. Once construction is complete, the loan converts to a standard home loan with principal and interest repayments.

Progressive drawdown (also called progress payments) is the process of releasing construction loan funds in stages as building milestones are completed. Your builder invoices for each stage, the lender inspects the completed work, and funds are released to pay the builder. This protects both you and the lender by ensuring money is only released as real value is created. Typically 5 to 6 progressive drawdowns occur during a build.

The standard construction loan stages are: deposit (5% of building contract), slab/foundation (15% to 20%), frame (approximately 20%), lock-up (approximately 20%), fit-out/fixing (approximately 30%), and completion (approximately 10%). Each stage triggers a progressive drawdown. Percentages may vary based on your builder and building contract. Our mortgage broker team ensures the payment schedule aligns with your lender's requirements.

Yes. During construction, your repayments are interest only on the funds drawn so far. You do not pay principal during the build phase. This keeps repayments lower while you may also be paying rent elsewhere. Your interest only payments increase with each progressive drawdown as more of the construction loan is released. Once construction is complete, the loan converts to principal and interest repayments.

Most lenders require a 20% deposit (an LVR of 80% or less) based on the total cost (land plus construction). You can still get a construction loan with less than 20%, but you will need to pay Lenders Mortgage Insurance. If you already own land, the equity in that land can count toward your deposit. Our property deposit calculator helps you estimate the total amount needed.

An as-completed valuation estimates what your property will be worth once construction is finished. The lender uses this to determine your LVR and how much they will lend. A higher as-completed valuation means a lower LVR and potentially a better rate. Our mortgage broker team knows which lenders tend to provide higher as-completed valuations in different Sydney areas, maximising your borrowing capacity.

A fixed price building contract locks in the total cost of your build at the start, protecting you from unexpected price increases. Most lenders require a fixed price contract for a construction loan because it provides certainty about the total project cost. The contract includes a detailed progress payment schedule showing the cost of each stage. Variations (changes during the build) are priced separately.

Lenders typically require: contract works insurance (covering the build against damage during construction), public liability insurance (your builder carries this, minimum $5 million to $20 million), and home warranty insurance (protecting you if the builder cannot complete the work). All insurance must be in place before the first progressive drawdown. Our mortgage broker team provides a detailed insurance checklist.

Yes. If you already own land (either outright or with a mortgage), you can apply for a construction loan to build on it. The equity in your land can count toward the deposit. Your lender will value the land plus the proposed construction to determine the total LVR. Our home equity calculator helps you estimate your land equity.

A house and land package involves purchasing land and a building contract together, usually from a developer or project builder. The construction loan may involve two settlements: one for the land and one for the construction. Some lenders have specific products for house and land packages. Our mortgage broker team identifies the best lender for your specific package and coordinates both transactions.

Yes. A knock down rebuild involves demolishing an existing property and building a new one on the same land. The construction loan covers demolition costs and the new build. The as-completed valuation is based on the new home's estimated value. If you currently live in the property, you will need alternative accommodation during the build (typically 12 to 18 months). Our mortgage broker team structures the finance to cover the full project.

Some lenders offer owner builder construction loans, but the requirements are much stricter. You typically need an owner builder permit, licensed tradespeople for all specialist work, detailed cost estimates, and a larger deposit (often 30% or more). Fewer lenders accept owner builders. Our mortgage broker team identifies which lenders on our panel support owner builder projects and what additional documentation is required.

Changes during construction (variations) can increase costs. If costs exceed your approved construction loan, you need additional funds from savings or a loan increase. A fixed price building contract limits this risk, but variations you choose (such as upgrading finishes) are priced separately. Our mortgage broker team recommends a 5% to 10% contingency buffer in your budget and advises on managing cost overruns if they occur.

Most lenders require construction to commence within 6 to 12 months of loan approval and be completed within 12 to 24 months from the first progressive drawdown. If your build takes longer due to delays, you may need to apply for an extension. Our mortgage broker team monitors your build timeline and proactively manages extensions with the lender if needed.

A progress inspection is when the lender sends an independent valuer or inspector to verify that the building stage has been completed to the required standard before releasing the next progressive drawdown. Progress inspections typically take 3 to 7 business days. Some lenders charge a drawdown fee (also called a progressive drawing fee) for each inspection, typically $150 to $300 per stage.

Construction loan fees typically include: application fee ($0 to $600), drawdown fee per progress payment ($150 to $300 per stage, 5 to 6 stages), valuation fee for the as-completed valuation ($300 to $600), and standard loan fees (discharge, settlement). Some lenders waive the application fee for construction loans. Our mortgage broker team compares total fees across lenders, not just interest rates, to find the most cost-effective option.

You can apply for pre-approval before council approval, but formal construction loan approval requires council-approved building plans. The lender needs to see the approved plans for the as-completed valuation. Having council approval before applying speeds up the process significantly. Our mortgage broker team advises on the optimal timing for your application relative to the council approval timeline.

Your builder obtains a Certificate of Occupancy (or Occupation Certificate), confirming the property meets all building standards and is safe to inhabit. The lender conducts a final inspection. Your construction loan converts to a standard home loan with principal and interest repayments. You can then choose fixed or variable rates. Our mortgage broker team can also help you refinance to a better rate once the build is complete.

Yes, for major renovations. A construction loan with progressive drawdown is suitable for significant renovation projects (typically $100,000 or more) involving structural changes, extensions, or complete refurbishments. Smaller renovations may be better funded through a standard equity release. Our mortgage broker team advises on the best approach based on the scope and cost of your renovation.

Yes. First home buyers can access construction loans and may also qualify for the First Home Owner Grant (for new builds), stamp duty concessions, and the Home Guarantee Scheme (which allows building with a 5% deposit without LMI). Our mortgage broker team helps first home buyers navigate construction loans alongside all applicable grants and schemes.

Yes. Self-employed borrowers can access construction loans with stricter documentation (typically 2 years of tax returns). Our mortgage broker team knows which lenders are most flexible for self-employed construction loan applicants.

A Certificate of Occupancy (or Occupation Certificate in NSW) is an official document confirming that the completed building meets all relevant building standards, fire safety requirements, and council conditions. It confirms the property is safe and legal to inhabit. Your builder or certifier obtains this certificate at the completion stage. The lender requires it before releasing the final progressive drawdown and converting your construction loan.

Yes. A construction loan can be used to build an investment property. Investment construction loans have slightly higher rates than owner-occupier loans. The interest during construction may be tax-deductible if the property will be rented out. Our mortgage broker team structures the construction loan for maximum tax efficiency when building an investment property.

Yes. Construction loans are significantly more complex than standard home loans. A mortgage broker compares rates across 35+ lenders (many of which handle construction differently), ensures your building contract and insurance meet lender requirements, coordinates every progress payment through 5 to 6 stages over 12 to 24 months, manages extensions and variations, and oversees the conversion to a standard home loan at completion. The service costs $0.