Question 1

How is a construction loan different from a normal home loan?

Accepted Answer

The core difference is how the money is released.  A standard home loan settles as a single lump sum. A construction loan is drawn down progressively, in stages, as building work is completed and verified.  This has three practical consequences: • You pay interest only on what has been drawn, so early repayments are low and grow through the build • Each stage requires a progress claim from your builder and usually a lender inspection • The loan converts to a standard principal and interest loan once construction is complete  The approval process also assesses the build itself — plans, contract and builder — not just you and the land.

Question 2

What are the typical construction loan stages?

Accepted Answer

Most Australian residential builds are financed across five progress payments:  • Slab or base — foundation laid • Frame — structural frame erected • Lock-up — external walls, windows and doors installed • Fixing or fit-out — internal fittings, cabinetry and finishes • Practical completion — final works finished and certificate issued  The percentage split across these stages is set out in your building contract and varies by builder and state. Your lender will assess whether the schedule is reasonable before approving.

Question 3

Do I need a fixed-price building contract?

Accepted Answer

For most lenders, yes.  A fixed-price contract from a licensed builder gives the lender certainty about the total cost, which is what they are lending against. Cost-plus contracts, where the final figure is open-ended, are accepted by very few lenders and usually on tighter terms.  You will generally also need: • Council-approved plans and specifications • Builder's licence and current insurance details • Home warranty or builders warranty insurance, depending on your state  Owner-builder finance exists but is genuinely difficult — expect a lower LVR, more documentation and a much smaller pool of lenders.

Question 4

What happens if the build goes over budget or runs late?

Accepted Answer

This is the risk that catches people out, so it is worth planning for before you start.  Cost overruns are not automatically covered. Variations you request during the build, or items excluded from the original contract, generally have to be funded by you or by a formal loan increase — which means a new application and reassessment.  Delays matter because construction loans have a set construction period, commonly twelve months. If the build runs past it, you may need to apply for an extension, and lenders are not obliged to grant one.  A contingency buffer of around five to ten per cent of the build cost, held outside the loan, is sensible.

Question 5

Can I use a construction loan for a major renovation?

Accepted Answer

Often yes, though the structure depends on the scale of work.  Substantial structural renovations — extensions, second storeys, knock-down rebuilds — are typically financed the same way as a new build, with progressive drawdowns against a fixed-price contract.  Smaller cosmetic renovations are usually better funded by accessing existing equity through a standard loan increase or a line of credit. That avoids the administrative overhead of staged drawdowns and inspections.  The dividing line is roughly whether council approval and a licensed builder's contract are required.

Question 6

How much deposit do I need for a construction loan?

Accepted Answer

Lenders assess the loan against the total of the land value plus the fixed-price build cost, referred to as 'on completion' value.  As with a standard home loan, holding 20% of that combined figure avoids Lenders Mortgage Insurance. Construction lending above 80% LVR is available with LMI, though policy is tighter than for an established property.  Worth noting: if you already own the land outright or have equity in it, that equity counts toward your contribution — which is why many people build on land they have held for some time.

Construction Loans

How Construction Lending Works

Progressive Drawdown

Interest Only While Building

Valuation at Each Stage

Fixed-Price Contract

The Five Progress Payment Stages

Slab down

Frame

Lock-up

Fit-out / fixing

Practical completion

Read Before You Build

Construction loans in Australia

Construction loans guide

Construction Loan FAQs

Financing a Build?