How a construction loan is paid out
With a standard purchase, the lender releases the full loan at settlement. With construction, funds are released in stages – often called progress payments or drawdowns – as each part of the build is completed and the builder submits a claim. The stages are set out in your building contract, and a typical schedule runs from base or slab, through frame and lock-up, to fixing and practical completion.
During construction you generally pay interest only on the amount drawn so far, which means repayments start small and rise as the build progresses. When the build is finished, the loan moves to your chosen repayment structure.
What lenders usually want to see
- A fixed-price building contract with a licensed builder
- Approved plans and specifications, with council or certifier approval
- A schedule of works and the builder's insurance details
- Evidence of your deposit, income and living expenses
- A valuation of the finished project, based on the plans
Policy varies between lenders, and some are far more comfortable than others with owner-builders, knockdown-rebuilds or unusual projects. That is where comparing across a panel pays off.
Get the order right
The most expensive construction-loan mistakes usually happen before a contract is signed. A short conversation first helps you check that the numbers work, that the contract will satisfy a lender, and that you've allowed for the extra costs of building, such as holding costs while you wait to move in. You can also run the numbers yourself with our upfront costs calculator, borrowing power calculator and stamp duty calculator.
Read the in-depth guide: construction loans explained →
Frequently asked
How does a construction loan work?
Instead of releasing the full amount at settlement, the lender pays the loan out in stages (progress payments) as your builder completes each part of the build – commonly base or slab, frame, lock-up, fixing and completion. During the build you generally pay interest only on the amount drawn so far, then the loan moves to normal principal-and-interest repayments (or your chosen structure) once construction finishes.
What do lenders need before approving a construction loan?
Typically a signed fixed-price building contract with a licensed builder, council or private-certifier approved plans, a schedule of works, builder insurance, evidence of your deposit and income, and a valuation based on the plans. Requirements differ between lenders, which is why it helps to compare before you sign a contract.
Can I borrow for the land and the build together?
Often yes. Many lenders will assess a purchase of land plus a build as one application, with land settled first and the build funded through progress payments. How the deposit and equity are treated varies by lender, so it's worth mapping out before you commit to either.
What is a progress payment?
A progress payment is a draw on your loan to pay the builder once a stage of the build is finished. The builder issues a claim, the lender usually arranges an inspection or confirms completion, and funds are released. You'll normally pay interest only on what has been drawn so far.
Can I use equity in an existing property for a knockdown-rebuild?
In many cases, yes. Lenders can consider the value of your existing home, or its value on completion, and what you owe against it. A knockdown-rebuild is assessed differently to a standard purchase, so lender policy and structure matter a lot.
Is an owner-builder loan harder to get?
Generally, yes. Fewer lenders will fund owner-builder projects, and those that do tend to apply tighter conditions. If you're considering this route, talk to a broker early to understand what is available for your situation.
Does a construction loan have different costs to a normal home loan?
It can. Besides the usual loan costs, there may be valuation, inspection or progress-payment fees, and you may also face holding costs such as rent while you build. Your broker can help you build these into your budget, and our upfront costs calculator is a good starting point.
What happens if the build costs more than expected?
Cost increases need to be covered from your own funds or by arrangement with the lender, and variations to the contract may need lender approval. Having a buffer, and a builder contract with clear inclusions, is important. A broker can help you plan for this before you apply.