Construction loans fund the building of a new home, whether you're building your dream home or engaging a builder. This comprehensive guide covers everything about construction finance in Australia.
What is a Construction Loan?
A construction loan funds building a new home from the ground up.
Key differences from standard home loans:
- Funds released in stages (not lump sum)
- Progress inspections required
- Interest on drawn amount only
- Typically 12-18 month construction period
- Converts to standard mortgage after completion
Common uses: ✅ Building new owner-occupied home ✅ Knockdown and rebuild ✅ Building investment property ✅ Owner-builder projects ✅ Dual occupancy/duplex builds
Construction Loan Rates 2025
Bank construction loans:
- Variable rate: 6.0-7.5% p.a.
- Fixed rate: 5.8-7.2% p.a.
- Same as standard home loan rates
Non-bank/private construction:
- Private lender rates: 8-15% p.a.
- Owner-builder premium: +1-2%
During construction:
- Pay interest only on drawn amount
- If drawn $200k of $500k loan: interest on $200k only
After completion:
- Loan converts to standard P&I mortgage
- Full principal repayments begin
- 25-30 year term
How Construction Loans Work
The Progress Payment System
Funds released in stages as building progresses:
Stage 1: Deposit/Base (10-15%)
- Builder's deposit
- Site works, foundation, slab
- Draw: $60,000 (of $400k loan)
Stage 2: Frame (25-30%)
- Frame erected
- Roof structure
- Draw: $100,000
Stage 3: Lock-Up (40-50%)
- Windows and doors installed
- External cladding complete
- Draw: $80,000
Stage 4: Fixing (70-80%)
- Internal walls, plumbing, electrical
- Kitchen, bathroom fit-out
- Draw: $80,000
Stage 5: Completion (100%)
- Final finishes
- Practical completion
- Final draw: $80,000
Each progress payment requires:
- Builder progress claim
- Bank inspection (or QS report)
- Invoice verification
- Usually 7-10 days to release funds
Interest During Construction
You only pay interest on funds drawn:
Month 1-2: $60k drawn @ 6.5% = $325/month Month 3-4: $160k drawn = $867/month Month 5-6: $240k drawn = $1,300/month Month 7-9: $320k drawn = $1,733/month Month 10-12: $400k drawn = $2,167/month
Average during construction: ~$1,200/month
After completion: Full P&I on $400k = $2,738/month
Land + Construction Packages
Most construction loans include land purchase:
Scenario 1: Land First, Build Later
You already own the land:
- Land equity: 20-40%
- Borrow for construction only
- LVR based on completed value
Example:
- Land value: $300,000 (owned outright)
- Construction cost: $400,000
- End value: $800,000
- Borrow: $400,000 (50% LVR)
- Equity: $300k land + $100k cash
Scenario 2: Buy Land + Build Package
Purchase land and build in one loan:
- Single approval covers both
- Buy land (settled immediately)
- Build over 12 months
- Pay land interest while building
Example:
- Land purchase: $300,000
- Construction: $400,000
- Total loan: $700,000
- Deposit: 20% = $140,000
- Borrow: $560,000 (80% LVR)
During construction:
- Land fully drawn: $300k
- Construction partial: $0-400k
- Interest on land + drawn construction
Bank vs Private Construction Loans
Bank Construction Loans
Advantages: ✅ Best rates (6-7.5% p.a.) ✅ Established processes ✅ Convert to standard home loan ✅ Higher LVRs (up to 95% with LMI) ✅ Better for owner-occupiers
Requirements: Good credit score (650+) Stable employment/income Serviceability assessment Registered/insured builder Fixed price contract Council-approved plans Detailed specifications
Approval timeline: 3-6 weeks
Private Construction Loans
Advantages: ✅ Flexible credit requirements ✅ Owner-builders accepted ✅ Fast approval (1-2 weeks) ✅ Unconventional builds OK ✅ Asset-focused lending
Trade-offs: **Higher rates (8-15% p.a.) **Lower LVRs (65-80%) **Higher fees **Shorter terms initially
Best for:
- Owner-builders
- Borrowers with credit issues
- Quick starts
- Unique builds
- Can't meet bank criteria
Owner-Builder Construction Loans
Building your own home? Special considerations:
Bank Criteria for Owner-Builders
Most banks won't lend to owner-builders, but some will if: ✅ You have building experience/qualifications ✅ Licensed trades for specialized work ✅ Detailed cost breakdown ✅ Timeline and project plan ✅ Home warranty insurance ✅ Lower LVR (70-80% max)
Typically require:
- Building license or qualification
- Detailed costing (quantity surveyor)
- Builder's indemnity insurance
- All permits approved
- Cash buffer for overruns
Private Lenders for Owner-Builders
More flexible:
- Don't require building qualifications
- Higher LVRs possible (70-85%)
- Experience helpful but not essential
- Focus on end value and equity
Typical requirements: ✅ 20-30% equity ✅ Detailed cost breakdown ✅ Realistic timeline ✅ Some building knowledge ✅ Licensed trades for electrical/plumbing
Rates: 9-15% p.a. during construction
Construction Loan Requirements
What you'll need to apply:
For All Construction Loans
Property details: ✅ Approved building plans ✅ Building permit/DA approval ✅ Soil test (if required) ✅ Contour survey ✅ Bushfire rating (if applicable)
Cost documentation: ✅ Fixed price building contract OR ✅ Detailed cost breakdown (owner-builder) ✅ Quantity surveyor report (often required)
Financial: ✅ Deposit 20-40% (land + build) ✅ Proof of income (banks) ✅ Savings/equity evidence ✅ Good credit (banks)
Builder information: ✅ Builder registration/license ✅ Home warranty insurance ✅ Public liability insurance ✅ Contract signed
Valuation
Banks require valuation of:
- Current land value (if owned)
- 'As if complete' value (finished home)
Valuer considers:
- Location and land value
- Building plans and specifications
- Comparable completed sales
- Quality of finishes
Example valuation:
- Land: $350,000
- Construction cost: $450,000
- 'As if complete' value: $850,000
- LVR calculated on $850,000
Knockdown Rebuild Loans
Demolishing existing home and building new:
Typical structure:
- Purchase existing home (if buying)
- Demo existing dwelling
- Build new home
Loan includes:
- Land/existing property purchase
- Demolition costs ($15-30k)
- Construction costs
- All fees and charges
LVR based on:
- End value (new home completed)
- Not existing dwelling value
Example:
- Old house value: $600,000
- Demolition: $20,000
- New build: $500,000
- End value: $950,000
- Borrow 80% = $760,000
- Need: $190,000 equity/deposit
Special considerations:
- Must have somewhere to live during build
- 12-18 month construction period
- Paying rent + interest during build
- Insurance issues (demo period)
Construction Loan Timeline
Typical journey from application to completion:
Pre-Application (2-6 months)
- Find land or knockdown
- Engage architect/draftsman
- Design plans
- Get council approval
- Choose builder
- Get fixed price quote
Application & Approval (3-6 weeks)
- Submit full application
- Bank valuation ordered
- Credit assessment
- Conditional approval
- Formal approval
Land Settlement (if applicable)
- Settlement on land purchase
- First drawdown
- Begin paying interest on land
Construction Phase (9-18 months)
- Stage 1: Base (Month 1-2)
- Stage 2: Frame (Month 3-4)
- Stage 3: Lock-up (Month 5-7)
- Stage 4: Fixing (Month 8-11)
- Stage 5: Completion (Month 12-14)
- Handover and defects period (Month 14-15)
Each stage:
- Builder completes work
- Builder submits progress claim
- Bank inspects (3-5 days)
- Funds released (5-10 days)
- Pay builder
- Next stage begins
Post-Completion
- Final inspection
- Practical completion certificate
- Loan converts to standard mortgage
- Begin principal + interest repayments
Interest During Construction: Budgeting
Plan for interest-only payments while building:
$500,000 construction loan @ 6.5% p.a.:
Month 1-2: $75k drawn = $406/month Month 3-4: $150k drawn = $813/month Month 5-7: $250k drawn = $1,354/month Month 8-10: $375k drawn = $2,031/month Month 11-14: $500k drawn = $2,708/month
Average: ~$1,500/month during construction
Plus:
- Rent (if you don't own home): $2,000/month
- Total carrying cost: $3,500/month
Budget for: 18 months x $3,500 = $63,000
Construction Loan Costs & Fees
What to budget beyond the build:
Lender fees:
- Application fee: $0-$1,000
- Valuation: $300-$800
- Progress inspection fees: $200-$400 x 5 = $1,000-2,000
- Settlement fee: $0-$500
Construction costs:
- Council fees: $5,000-$15,000
- Building insurance: $1,500-$3,000
- Utilities connection: $5,000-$15,000
- Landscaping: $10,000-$50,000
- Driveways/fencing: $10,000-$30,000
Professional fees:
- Architect/draftsman: $5,000-$25,000
- Engineer: $2,000-$8,000
- Soil test: $800-$2,000
- Survey: $800-$2,000
- Energy rating: $300-$800
Total additional costs: $40,000-$150,000
Always include 10-15% contingency
Common Construction Loan Mistakes
1. Underestimating Total Costs
Forgetting landscaping, driveway, fencing No contingency for variations Missing connection fees
✅ Solution: Add 15% buffer to all quotes
2. Poor Timeline Planning
Assuming everything on schedule No buffer for delays Can't carry extra months of interest
✅ Solution: Add 30-50% to builder's timeframe
3. Wrong Loan Structure
Using private when bank would approve Not locking in rate Insufficient offset account
✅ Solution: Get broker advice on structure
4. Cash Flow Crunch
All money in land/deposit No buffer for interest during construction Can't fund variations
✅ Solution: Keep 20-30k liquid cash reserve
Tips for Construction Loan Success
Before you start:
- Get pre-approval first - Know your budget
- Fixed price contract - Avoid cost overruns
- Experienced builder - Check reviews and past work
- Detailed plans - Reduces variations
- Energy efficiency - May qualify for grants
During construction: 6. Regular site visits - Monitor progress 7. Communication - Stay in touch with builder 8. Document everything - Photos at each stage 9. Manage variations - Approve costs before work 10. Buffer fund - Keep $20-30k for unknowns
Finishing up: 11. Defects list - Before final payment 12. Completion documents - For council/bank 13. Refinance check - Can you get better rate?
Refinancing After Construction
Once complete, you have options:
Option 1: Keep existing loan
- Converts to standard home loan automatically
- Rate usually same as construction phase
- Easiest option
Option 2: Refinance to better rate
- Home now completed and valued
- Shop for better rate
- Could save $100s/month
- Factor in refinance costs
When to refinance: ✅ 1%+ better rate available ✅ 6+ months after completion ✅ Valuation shows good equity ✅ Credit improved since application
Example savings:
- $500k loan at 7% = $3,605/month
- Refinance to 6% = $3,239/month
- Save $366/month ($4,392/year)
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