Construction Loans: Building or Rebuilding
How a construction loan works, how progress payments are released stage by stage, what lenders need, and the risks to manage, explained simply by an Adelaide mortgage broker.
A construction loan funds building a new home, releasing money in stages as the build reaches milestones, rather than all at once. You generally pay interest only on the amount drawn so far during the build, then the loan converts to a normal home loan once construction finishes. You will need a fixed price building contract and council approved plans.
Building is different to buying, and so is the loan. A construction loan does not hand over the full amount on day one. Instead it releases funds in stages that track your builder reaching milestones, so the lender pays for work as it is completed. During the build you usually pay interest only on what has been drawn, which keeps repayments lower while you may also be paying rent. Once the home is finished, the loan rolls over into a standard mortgage. Getting the structure right from the start keeps the build moving and the cost down.
What a construction loan is
A construction loan is a home loan designed for building rather than buying an existing home. The defining feature is staged funding: the lender releases money in chunks as the build progresses, instead of a single lump sum. It is built around your fixed price building contract.
How progress payments work
Funds are released in stages tied to your builder completing each phase of the build. At each stage the lender pays the builder, and you generally pay interest only on the total drawn so far.
| Stage | What it covers |
|---|---|
| Deposit | Initial payment to start the build |
| Base or slab | Foundations and slab laid |
| Frame | Frame built and approved |
| Lock up | Walls, roof, windows and doors on |
| Fixing | Internal fit out, cabinetry, fixtures |
| Completion | Final works and handover |
Interest during construction
You do not pay interest on the whole approved loan from day one. Interest is charged only on what has been drawn down so far, so your repayments start small and rise as more of the loan is released. This keeps holding costs lower during the months you may also be paying rent.
What lenders need
Construction lending needs more paperwork than buying an existing home, because the lender is funding work that does not exist yet.
- A fixed price building contract.
- Council approved plans and permits.
- Builder details and their insurance.
- Valuations, often at stages through the build.
Construction loan versus a normal home loan
The big differences are staged funding and interest only during the build. A normal home loan settles once and you repay principal and interest from the start. A construction loan releases in stages, charges interest on the drawn amount during the build, then converts to a standard loan at completion. The end result is a normal mortgage either way.
Owner builder and major renovations
If you are acting as an owner builder rather than using a licensed builder, lending is harder and fewer lenders will help, because the risk is higher without a fixed price contract. Major renovations, extensions and knock down rebuilds are also typically funded with a construction loan rather than a simple loan increase, since the work is staged.
A typical timeline and what to expect
From finance approval to handover, a build runs over months, moving through the stages above with a valuation and a drawdown at each. Delays and variations are common, so a buffer in your budget and your timeline is wise. Your repayments grow as each stage is funded, which is worth planning for.
The risks and how to manage them
Building carries risks a purchase does not, and the loan structure means some of them land on you.
- Cost overruns and variations beyond the fixed contract.
- Delays that extend the period you pay rent and interest.
- Builder issues, which is why insurance and a solid contract matter.
- Keeping a budget buffer for the unexpected.
Is a construction loan right for you?
If you are building or undertaking major structural work with a licensed builder and a fixed price contract, a construction loan is the right tool and usually the only one that fits. If your project is cosmetic or moderate, a simple loan increase may be cheaper and simpler. Matching the loan to the project from the start is the key.
- A construction loan releases funds in stages as the build progresses.
- You usually pay interest only on what has been drawn during the build.
- You need a fixed price contract and council approved plans.
- It converts to a normal home loan once the build is complete.
- Build a buffer for cost overruns and delays.
Finance your build the right way
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Construction Loans: common questions
What is a construction home loan?
A construction home loan funds building a new home or a major structural renovation. Unlike a normal loan, the money is released in stages as the build reaches each milestone, and it usually converts to a standard home loan once the build is finished.
How do progressive drawdowns work on a construction loan?
Instead of paying the full loan at settlement, the lender releases funds to your builder in instalments, called drawdowns, as each building stage is completed. You generally pay interest only on the amount drawn so far.
Do I pay interest on the whole loan during construction?
No. During the build you pay interest only on the funds drawn down so far, not the full approved amount. Your repayments start small and rise as more of the loan is released through the stages.
What are the standard stages of a construction loan?
Most builds follow set stages: a deposit or base or slab stage, frame, lock up, fixing, then practical completion. The lender releases a payment to the builder as each stage is finished and verified.
What is an as if complete valuation?
An as if complete valuation is a lender ordered estimate of what your finished home will be worth, based on your plans and the building contract, before construction starts. It helps the lender set the loan against the end value.
How much deposit do I need for a construction loan?
Deposit is usually assessed on the combined value of the land plus the building contract. Many borrowers aim for around 20 percent to avoid lenders mortgage insurance, though lower deposit options exist with some lenders.
Can I get an interest only period during construction?
Yes. Construction loans are typically interest only during the building phase, usually for a limited period such as up to a year or two, then they convert to principal and interest once the home is complete.
What is a fixed price building contract?
A fixed price building contract is an agreement with a licensed builder that sets a guaranteed total cost for the build. Lenders generally require one, because it limits the risk of cost blowouts during construction.
What documents do I need for a construction loan?
Lenders generally want your income evidence, a signed fixed price building contract, the builder progress payment schedule, council approved plans and permits, and the builder details and insurance certificates.
Can I get a construction loan as an owner builder?
It is harder. Many lenders will not finance owner builders because there is no fixed price contract and the risk is higher. Some specialist lenders will consider it, usually with a lower maximum loan to value ratio.
What happens if there are variations or cost overruns?
If you make changes that increase the price after the loan is approved, those variations usually have to be paid from your own funds before the lender releases the next stage payment. The fixed price contract covers only the agreed scope.
How does a house and land package loan work?
A house and land package is usually financed as two connected parts: a loan to buy the land first, then a construction loan to fund building the home. The land settles, then drawdowns fund the build stage by stage.
When does a construction loan become a normal home loan?
Once the final stage is drawn, the home passes its completion checks, and any final valuation is done, the construction loan automatically converts to a standard principal and interest home loan.
Can I get a construction loan with a guarantor?
Yes. Eligible buyers, often first home buyers, can use a family guarantor on a construction loan. A guarantee can let you borrow for land and build without a large cash deposit and avoid lenders mortgage insurance.
What happens if my builder goes bust during construction?
If your builder becomes insolvent, work stops and you generally claim under your state domestic building insurance. You then arrange a new builder, and your lender will need to approve the new contract before funding continues.
How are construction loan funds paid out?
In stages tied to your builder reaching milestones such as slab, frame, lock up, fixing and completion. The lender pays the builder at each stage, and you generally pay interest only on the amount drawn so far.
Do I pay interest on the whole loan during the build?
No. Interest is charged only on what has been drawn down so far, so your repayments start small and grow as more of the loan is released through the build.
What deposit do I need for a construction loan?
It varies by lender and the total cost of land plus build. As with a normal loan, borrowing above a certain share of the end value can trigger lenders mortgage insurance.
What documents do I need?
Lenders generally want a fixed price building contract, council approved plans and permits, your builder details and insurance, and they will order valuations, often at stages through the build.
Can I get a construction loan as an owner builder?
It is harder. Fewer lenders fund owner builders because there is no fixed price contract and the risk is higher, so the terms are usually stricter.
What happens when construction finishes?
Once the build is complete and the final stage is drawn, the construction loan converts to a standard home loan, and you begin repaying principal and interest in the normal way.
Can I use a construction loan for a major renovation?
Yes. Structural work, extensions and knock down rebuilds are typically funded with a construction loan, since the funds are released in stages. Cosmetic work is usually better suited to a loan increase.
Related guides
General information only. This page provides general information about home loans and is not financial or credit advice, a quote, or a guarantee, and your personal circumstances have not been considered. Lending policies, interest rates, fees and eligibility vary by lender and change over time. Always confirm your own situation with a licensed mortgage broker or lender before acting. Ross McFarlane (Credit Representative 526725) is an authorised Credit Representative of Australian Associated Advisers Pty Ltd t/a Keylend, Australian Credit Licence 392169.