If you are building a new home or completing a major renovation, a standard home loan will not work. Construction loans are structured differently — funds are drawn in stages as construction progresses, interest is charged only on the amount drawn, and lenders have specific requirements around builders, contracts, and council approvals. This guide covers everything you need to know.
How Construction Loans Differ from Standard Home Loans
A standard home loan provides the full loan amount at settlement. A construction loan releases funds progressively — in 5–6 stages that correspond to construction milestones. You only pay interest on the amount drawn down at each stage, which means your repayments start small and increase as construction progresses.
Construction loans typically run for a construction period (usually 12–24 months) before converting to a standard home loan upon completion. During the construction period, most lenders offer interest-only repayments on the drawn amount.
Lenders assess construction loans differently from standard loans. In addition to your income, expenses, and borrowing capacity, the lender evaluates the builder, the building contract, council approvals, and the expected end value of the completed property. This means more documentation and a longer application process.
Interest During Construction
Because you only pay interest on the amount drawn, your repayments during the first few months of construction are significantly lower than after completion. Budget for the gradual increase in repayments as each progressive drawdown occurs.
The Progressive Drawdown Process: Stage by Stage
Most construction loans draw down in five or six stages, aligned with standard construction milestones:
Stage 1 — Base/Slab (typically 10–15% of total construction cost): Covers site preparation, excavation, and laying of the concrete slab or foundations.
Stage 2 — Frame (15–20%): Covers the timber or steel frame, roof trusses, and initial plumbing and electrical rough-in.
Stage 3 — Lock-up/Enclosed (20–25%): Covers external walls, roofing, windows, and doors — the building is now 'locked up' and weather-proof.
Stage 4 — Fixing (20–25%): Covers internal fit-out — plasterboard, kitchen installation, bathroom tiling, internal doors, and built-in cabinetry.
Stage 5 — Completion/Practical Completion (10–15%): Covers final finishes — painting, flooring, final electrical and plumbing connections, landscaping, and cleanup.
At each stage, the builder issues a progress claim (invoice). Your lender sends a valuer or inspector to confirm the work has been completed to the claimed stage before releasing the next drawdown.
- ✓Base/Slab: 10–15% — foundations and concrete slab
- ✓Frame: 15–20% — structural frame, roof trusses, rough-in
- ✓Lock-up: 20–25% — external walls, roof, windows, doors
- ✓Fixing: 20–25% — internal fit-out, kitchen, bathrooms
- ✓Completion: 10–15% — final finishes, painting, landscaping
Builder Requirements and Contract Essentials
Lenders have strict requirements for the builder and the building contract. The builder must be a licensed, registered builder with current domestic building insurance (also known as builder's warranty insurance or Home Building Compensation Fund insurance, depending on the state). Lenders will verify the builder's registration and insurance status before approving the construction loan.
The building contract must be a fixed-price contract — meaning the total construction cost is agreed upfront and the builder bears the risk of cost overruns. Cost-plus contracts (where you pay actual costs plus a margin) are generally not accepted by mainstream lenders because the final cost is uncertain.
Council-approved plans and a construction certificate (or equivalent in your state) are required before the first drawdown. If you are building in a bushfire zone, flood zone, or heritage area, additional approvals and insurance may be required.
Builder Insolvency Risk
Builder insolvency is a real risk in Australia — particularly for smaller volume builders. Always verify your builder's registration and insurance, check their financial stability (ASIC searches), and ensure your building contract includes a genuine dispute resolution mechanism. Domestic building insurance protects you if the builder becomes insolvent during construction.
Frequently Asked Questions
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.