Construction Loans Australia: Complete Guide to Building Finance

Building a new home is exciting but requires different financing than buying an existing property. Construction loans are specifically designed for new builds, releasing funds in stages as your home takes shape.

How Construction Loans Work

Unlike standard home loans where you receive all funds at settlement, construction loans feature:

Progress Draw System

Funds are released at key construction milestones:

• Slab/Base stage (typically 15-20%)
• Frame stage (20-25%)

• Lock-up/Enclosed stage (20-25%)
• Fixing stage (15-20%)

• Completion (10-15%)

Interest-Only During Construction

During the build, you typically pay:

• Interest only on funds drawn
• Interest accumulates as more stages are paid

• Full principal and interest begins after completion

Types of Construction Loans

House and Land Packages

Simplified finance for combined land and build:

• Single loan covers land purchase and construction
• Land settled first, construction funds drawn progressively

• Often easier approval process

Construction on Owned Land

If you already own the land:

• Loan covers construction costs only
• May use land equity toward deposit

• More flexibility in builder choice

Knock-Down Rebuild

Demolishing existing home to rebuild:

• Covers demolition and new construction
• Land value provides security

• May require vacant possession before starting

Construction Loan Requirements

Builder Requirements

Lenders require your builder to be:

• Licensed and registered
• Properly insured (public liability, construction insurance)

• Financially stable
• Experienced with similar projects

Documentation Needed

• Council-approved building plans
• Fixed-price building contract

• Detailed specifications
• Builder's licence and insurance certificates

• Land ownership documents

Financial Requirements

Construction Loan Interest Rates

Construction loans often carry slightly higher rates than standard mortgages:

• Major banks: Variable from 6.5-7.5% p.a.
• Specialist lenders: 7-9% p.a.

• Private lenders: 9-14% p.a.

Rates may be higher during construction phase, then reduce at completion.

The Construction Loan Process

Stage 1: Pre-Approval

• Get finance pre-approved before signing contracts
• Understand your budget and borrowing capacity

• Include buffer for variations (10-15%)

Stage 2: Contract Signing

• Sign fixed-price building contract
• Finalise plans and specifications

• Submit to lender for formal approval

Stage 3: Formal Approval

• Lender assesses contract and plans
• Valuation of completed property

• Loan documents issued

Stage 4: Construction Begins

• Builder commences work
• Progress payments made at each stage

• Inspections verify completion of stages

Stage 5: Completion

• Final inspection and handover
• Certificate of Occupancy issued

• Loan converts to standard mortgage

When Banks Say No: Private Construction Finance

Private lenders can help when traditional banks decline, commonly due to:

• Builder not on approved list
• Unusual property type (rural, multiple dwellings)

• Complex income (self-employed, contractors)
• Tight timelines requiring fast approval

• Development-style projects rather than standard builds

Benefits of Private Construction Loans

• Speed - approvals in days
• Flexibility - non-standard builders accepted

• Asset focus - more weight on property value
• Experience - understanding of construction complexities

Managing Construction Risks

Cost Overruns

Protect yourself with:

• Fixed-price contracts (not cost-plus)
• Detailed specifications avoiding 'PC items'

• 10-15% contingency budget
• Variation clause review

Builder Issues

Mitigate risks through:

• Thorough builder research
• Progress inspections before payments

• Understanding dispute resolution
• Home warranty insurance

Timeline Delays

Plan for:

• Weather delays
• Material supply issues

• Labour shortages
• Council inspection backlogs

Frequently Asked Questions

How much deposit do I need for a construction loan?

Most lenders require 10-20% of total project cost (land + build). With Lenders Mortgage Insurance, some accept 5% deposits.

Can I be my own builder (owner-builder)?

Yes, but many lenders restrict owner-builder finance or require higher deposits. You'll need appropriate licences for your state.

What if my builder goes bankrupt mid-construction?

Home warranty insurance (required in most states) covers this scenario. Private lenders can also provide bridge finance to engage a new builder.

Can I include landscaping and driveways in the loan?

Many lenders include external works up to a limit (often $20,000-$50,000). This should be in your building contract.

How long does construction loan approval take?

Bank approvals: 2-4 weeks. Private lenders: 3-10 days.

Getting Started

Ready to build? Here's your action plan:

• Get pre-approved to understand your budget
• Choose your builder and finalise plans

• Sign contracts conditional on finance
• Submit for formal approval

• Begin your build

Building a home is a significant undertaking. The right finance partner can make the process smoother and help you achieve your dream home.