A construction loan funds both the land purchase and the building of your new home in stages, with the lender releasing money progressively as each phase of construction is completed.
How Construction Loans Differ from Standard Home Loans
With a standard home loan, you borrow the full amount upfront and begin making principal and interest repayments immediately. A construction loan releases funds progressively as the builder completes each stage, and you only pay interest on the amount drawn down at each point. During the construction phase, most borrowers make interest-only payments, which keeps costs lower while the home is being built. Once construction finishes, the loan converts to a standard principal and interest home loan.
Consider a buyer purchasing land for their new home in Craigieburn. The land settles first, triggering the initial drawdown. The lender then releases funds at each progress payment stage as the slab is poured, the frame goes up, and the roof is completed. Until the frame stage is reached, the buyer is only paying interest on the land cost and the base stage payment, not the full loan amount.
The Progress Payment Schedule Explained
Most builders work on a fixed price building contract with a progress payment schedule tied to construction milestones. Typical stages include base stage, frame stage, lock-up stage, fixing stage, and practical completion. Each stage represents a percentage of the total building cost, and the lender releases that portion once a progress inspection confirms the work is complete. The builder invoices for each stage, and the lender arranges the inspection before releasing funds directly to the builder.
Lenders require council approval and signed contracts before approving the construction loan. You'll need the land contract, the building contract, council plans, and evidence that the registered builder holds appropriate insurance. The lender will also want confirmation that you're required to commence building within a set period from the contract date, which protects against land banking.
Interest Costs During Construction
Because you only pay interest on funds drawn down, your repayments start lower and increase as each stage is funded. If the land costs $300,000 and the build costs $400,000, you'll initially pay interest only on the $300,000 land component. After the base stage draw of $80,000, you'll pay interest on $380,000, and so on. This structure keeps your repayments manageable during the build period, which typically runs between four and eight months depending on the builder's schedule and council processes.
Some lenders charge a progressive drawdown fee each time they release funds, typically between $300 and $500 per draw. Across five or six progress payments, this can add $2,000 to $3,000 to your upfront costs. Factor this into your budget alongside other settlement costs when planning your finance.
Fixed Price Contracts and Cost Plus Arrangements
Most lenders will only approve construction finance against a fixed price building contract, which locks in the total build cost before construction starts. This protects both you and the lender from cost overruns. A cost plus contract, where the builder charges for materials and labour with a margin on top, introduces uncertainty around the final loan amount. Very few mainstream lenders will fund cost plus arrangements, and those that do typically require a larger deposit and more detailed cost breakdowns.
In areas like Clyde North or Wyndham Vale, where house and land packages are common, most volume builders offer fixed price contracts as standard. The contract specifies inclusions, and any upgrades or variations are priced separately before work begins. This makes the loan application more straightforward, as the lender knows the exact amount required from the outset.
Deposit Requirements and Genuine Savings
Lenders typically require a 10% deposit for a land and construction package, though some will accept 5% with lender's mortgage insurance. The deposit must cover the land component at settlement, so if the land costs $300,000 and the total package is $700,000, your 10% deposit of $70,000 needs to cover the $300,000 land settlement. The lender will fund the shortfall on the land and then release the building funds progressively.
First home buyers using the First Home Guarantee or other government schemes may access lower deposit options, but the construction timeline must align with the scheme requirements. Some guarantees require construction to start within a certain period, and delays caused by council approval or builder availability can affect eligibility.
How Long the Approval Process Takes
Construction loan applications take longer than standard home loan approvals because the lender assesses both your financial position and the construction project itself. Expect the process to take two to four weeks from application to formal approval, depending on how quickly you can provide the required documents. The lender's valuer will assess the land value and the 'as if complete' value of the finished home, which determines how much they're willing to lend.
Once approved, the loan remains valid for a set period, typically six months, giving you time to finalise contracts and obtain council approval. If construction hasn't started by the expiry date, you may need to extend the approval or reapply, which can involve updated valuations and documentation.
Converting to a Standard Loan After Completion
Once the builder reaches practical completion and you receive the occupancy certificate, the loan converts from construction mode to a standard home loan. At this point, your interest-only repayments switch to principal and interest unless you've negotiated an ongoing interest-only period. The lender conducts a final inspection to confirm the home is complete and matches the approved plans before releasing the final progress payment.
The conversion happens automatically in most cases, though some lenders treat it as a variation and may charge a small fee. Your repayments will increase once the full loan balance is drawn and you're repaying both principal and interest, so budget for this change before construction finishes.
Call one of our team or book an appointment at a time that works for you to discuss your construction loan options and get your application underway.
Frequently Asked Questions
How does a construction loan differ from a standard home loan?
A construction loan releases funds progressively as each stage of building is completed, and you only pay interest on the amount drawn down at each point. A standard home loan provides the full amount upfront with immediate principal and interest repayments.
What deposit do I need for a house and land package?
Most lenders require a 10% deposit, though some accept 5% with lender's mortgage insurance. The deposit must cover the land component at settlement, with the lender funding the shortfall and then releasing building funds progressively.
Do lenders charge fees for each progress payment?
Many lenders charge a progressive drawdown fee each time they release funds, typically between $300 and $500 per draw. Across five or six payments, this can add $2,000 to $3,000 to your total costs.
What happens to my loan once construction finishes?
Once the builder reaches practical completion and you receive the occupancy certificate, the loan converts to a standard home loan. Your interest-only repayments switch to principal and interest unless you've arranged an ongoing interest-only period.
Will a lender approve a cost plus building contract?
Most lenders will only approve construction finance against a fixed price building contract, which locks in the total build cost before construction starts. Very few mainstream lenders fund cost plus arrangements due to the uncertainty around the final loan amount.
