A construction loan is a specialised home loan designed for building a new home or undertaking major renovations. Unlike a standard home loan where the full amount is disbursed at settlement, a construction loan is drawn down in stages — called progress payments or progress draw-downs — as the build progresses. You only pay interest on the amount drawn so far, which keeps your repayments lower during the construction period. However, construction loans involve additional complexity: builder contracts, council approvals, fixed-price requirements, and valuation at each stage.
How Is a Construction Loan Different from a Standard Home Loan?
The key difference is the draw-down structure. A standard home loan disburses the full loan amount at settlement — you start making full principal and interest (or interest-only) repayments immediately. A construction loan releases funds in stages as each phase of the build is completed, and interest is only charged on the amount drawn.
During construction, repayments are interest-only on the progressive balance. This means your repayments start very low (interest on the first draw-down, typically the slab or base stage) and increase with each subsequent draw-down. Once construction is complete and all funds are drawn, the loan converts to a standard home loan with full principal and interest repayments.
Construction loans typically require a fixed-price building contract with a licensed builder. Lenders need certainty about the total build cost to ensure the finished property will be worth more than the loan amount. Cost-plus contracts (where the final price is not fixed) are generally not accepted by mainstream lenders.
The maximum LVR for construction loans is typically 80–95% of the total end value — the estimated value of the completed property (land plus building). The lender will commission a valuation based on the plans and specifications to determine the end value before approving the loan.
Approval takes longer than a standard home loan: lenders require council-approved plans, a fixed-price building contract, builder's licence and insurance details, a construction timeline, and specifications. Expect 4–8 weeks for full approval, compared to 1–3 weeks for a standard purchase.
Owner-Builder Loans Are More Restrictive
If you are managing the build yourself (owner-builder), lending options are significantly more limited. Most mainstream lenders do not offer owner-builder construction loans. Those that do typically require lower LVRs (60–70%), higher deposits, evidence of building experience, an owner-builder permit, and detailed cost breakdowns. A licensed builder contract is always the easiest path to construction finance.
- ✓Funds drawn in stages — not all at once
- ✓Interest-only on progressive balance during construction
- ✓Converts to standard P&I loan after construction completes
- ✓Fixed-price building contract required by most lenders
- ✓Valuation based on completed (end) value of the property
- ✓Council-approved plans required before draw-down
- ✓Builder must hold appropriate licence and insurance
How Do Progress Draw-Downs Work? (The 5 or 6 Stage Process)
Construction loans are typically drawn in five or six stages, aligned with the standard building milestones defined by the HIA (Housing Industry Association) or MBA (Master Builders Association) contract:
Stage 1 — Deposit (typically 5%): Paid to the builder when the contract is signed. This may come from your own funds or the first loan draw-down.
Stage 2 — Base/Slab (typically 10–15%): Paid when the concrete slab or footings and base are completed. An inspector (or the lender's valuer) confirms the work is done before funds are released.
Stage 3 — Frame (typically 15–20%): Paid when the structural frame (walls, roof trusses, roof sheeting) is erected. This is a significant visual milestone — the shape of the house becomes visible.
Stage 4 — Lock-up (typically 20–25%): Paid when the building is enclosed — external walls, windows, doors, and roof are installed. The building is weather-tight and can be locked.
Stage 5 — Fixing (typically 20–25%): Paid when internal fittings are installed — plasterboard, kitchen, bathroom fixtures, internal doors, architraves, and cabinetry.
Stage 6 — Completion/Handover (typically 5–10%): Paid when the build is complete, the occupancy certificate is issued, and you take possession. A final inspection confirms everything meets the contract specifications.
At each stage, the builder issues a progress claim (invoice). The lender may commission an inspection or valuation to confirm the work matches the claim before releasing funds. This process protects both you and the lender from paying for work not yet completed.
Never Pay Ahead of Completed Work
Under Australian consumer building law, a builder cannot demand payment for a stage until the work for that stage is substantially complete. If a builder asks for payment before completing the claimed stage, do not pay — contact your lender and building inspector. Paying ahead removes your leverage if quality issues or disputes arise.
| Stage | Description | Typical % | What to Check |
|---|---|---|---|
| Deposit | Contract signed | 5% | Contract terms, builder licence, insurance |
| Base/Slab | Concrete slab poured | 10–15% | Slab dimensions match plans, drainage correct |
| Frame | Structural frame erected | 15–20% | Frame dimensions, roof trusses, bracing |
| Lock-up | Enclosed and weather-tight | 20–25% | Windows, doors, roof, external cladding |
| Fixing | Internal fittings installed | 20–25% | Kitchen, bathroom, plaster, cabinetry |
| Completion | Handover and occupancy certificate | 5–10% | Defects list, final inspection, certificate |
House and Land Packages vs Buying Land and Building Separately
You can structure a construction project two ways:
House and Land Package: A developer sells land with a building contract from a nominated builder. The purchase is effectively two transactions — a land purchase and a construction contract — but packaged together. The loan covers the land purchase (settled first) and the construction (drawn down progressively). This is the simplest option for first-time builders — the builder, plans, and pricing are predetermined.
Buying Land and Building Separately: You purchase a vacant block of land (with a standard home loan or land loan), then separately engage a builder and arrange a construction loan for the build. This gives you more control over design and builder selection — but requires more coordination and potentially two separate loan approvals.
Land loans have different terms to standard home loans. LVR limits are typically 80% for residential zoned land (vs 90–95% for established homes). Interest rates may be 0.25–0.50% higher. And lenders typically require you to demonstrate an intention to build within 2–5 years — vacant land held without development plans may not be approved.
Stamp duty considerations: In most states, when buying a house and land package where the house has not yet been built, stamp duty is calculated on the land value only — not the land plus construction cost. This can result in significant stamp duty savings compared to buying an equivalent established home. For example, in QLD, stamp duty on a $300,000 block of land is approximately $6,000, compared to approximately $15,000 on a $700,000 completed home.
The First Home Owner Grant (FHOG) typically applies to new builds. In most states, building a new home attracts the FHOG ($10,000–$30,000 depending on the state), whereas buying an established home may not. This is a significant financial incentive for building rather than buying established.
Stamp Duty on House and Land Packages
When buying a house and land package where construction has not commenced, stamp duty is typically calculated on the land component only — not the total package price. On a $700,000 package ($300,000 land + $400,000 build), you pay stamp duty on $300,000 instead of $700,000. This can save $10,000–$20,000 depending on your state. Confirm the exact treatment with your conveyancer.
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About the Author
Sakib Manzoor
Senior Finance Wellness Expert
Sakib Manzoor is the founder of Secure Finance and brings extensive experience in Australian mortgage broking and financial wellness. Specialising in helping clients achieve their property finance goals through personalised strategies and expert guidance, Sakib is FBAA accredited and committed to providing clear, actionable advice. All content is written to meet Australian regulatory standards and is regularly updated to reflect current market conditions.