Construction loan

You are building a new home to live in, investing in a new build, or extending your current property. Construction loans are available to both PAYG employees and self-employed borrowers.

Three situations come up most: buying land and building on it, knocking down and rebuilding on a block you already own, and a substantial renovation or extension that is too large for an ordinary top-up. The finance works the same way in each case, but the valuation and the deposit maths differ.

An ordinary home loan hands over the money once. A construction loan releases it in stages against work actually completed, and that changes three things.

You pay interest on what is drawn. Not on the full approved amount. During a build that keeps the holding cost meaningfully lower than it looks on paper, which the example below sets out.

Repayments are usually interest-only during the build. Principal repayments generally start once the loan converts to a normal mortgage at completion. If you are renting or paying an existing mortgage while building, that overlap is the number that decides whether the project is comfortable.

The lender values the finished house, not the site. Approval is based on the value of the land plus the completed build under a fixed contract, which is why the contract and plans matter as much as your income.

Drawdowns follow the standard progress stages: deposit, slab, frame, lock-up, fit-out and completion. Each one needs the builder's invoice, and most lenders require an inspection or valuation before releasing funds.

Approval timeframes are similar to an ordinary home loan; the build itself is what makes construction lending long. The steps below are indicative, and every timeframe past the first belongs to the lender, the valuer or the builder rather than to us.

1. Before you sign the builder. Talk to us first. What a lender will accept in a building contract shapes which contract you should be signing, and it is far easier to get right before signature than after.
2. Application. We lodge with the plans, specifications and the fixed-price building contract. The lender assesses your income against its own criteria and orders a valuation of the finished product.
3. The lender decides. If approved, formal approval is issued and documents follow. Approval is the lender's decision alone, and it is never certain until it is given.
4. Land settles, then building starts. The lender usually holds a mortgage equal to 100% of the construction cost, with your own contribution going entirely to the land.
5. Progress draws. At each stage your builder invoices, the lender inspects or values, and funds are released. We follow up at every stage so a drawdown does not hold up your builder.
6. Completion. After final inspection and occupancy certification, the loan converts to a normal mortgage and principal repayments begin.

Progress payments need sign-off before funds release, and delays can stretch interest-only periods. A fixed-price building contract makes approval smoother than cost-plus.

Variations are where budgets move. Anything you add once the contract is signed is generally not covered by the approved loan, so it has to be funded from your own cash or a further application that the lender may or may not approve. Deciding the specification before signing is worth more than any rate negotiation.

Builder risk is real. If a builder becomes insolvent mid-build you may be left with a partly finished house, drawn debt and a claim to pursue. Check the builder's licence and history, confirm domestic building insurance is in place, and keep the contingency intact rather than spending it on upgrades.

Most lenders expect the build to finish within a set window, commonly twelve to eighteen months. Long delays can require an extension the lender has to agree to.