Construction Loans: How Does It Work?
Building a home from the ground up is a huge milestone – one that lets you shape every detail to match your lifestyle, taste, and long-term goals. From choosing the block of land to customising the layout, it’s a chance to create something entirely your own. But while the design possibilities are exciting, the path to financing a new build is very different from buying an existing home.
Instead of paying the full purchase price upfront, building requires progress payments at each stage of construction – and that’s where construction loans come in. These loans are tailored specifically for people who are building or undertaking major renovations, offering a flexible structure that matches how funds are needed throughout the project.
In this blog, we’ll walk you through how construction loans work in Australia, what makes them different from standard mortgages, and what you should know before applying. Whether you’re a first-time builder or planning a large-scale development, understanding your finance options upfront can make the process far smoother – and save you thousands.
What is a Construction Loan?
A construction loan is a specialised type of home loan for people building a new property or taking on major renovations. Unlike standard mortgages that release the full loan amount at once, construction loans are drawn down in stages. This means the lender releases funds gradually as different phases of the build are completed. It’s a practical way to finance a project while keeping control over spending.
These loans are typically structured to suit residential builds but can also apply to more complex developments. The loan term is usually shorter during the construction phase, often around 12 months, before converting to a regular home loan once the property is complete.
How the Drawdown Process Works
Instead of borrowing a lump sum upfront, you receive funds in progress payments aligned with the key construction stages – from slab laying to final inspection. Your builder issues invoices at each stage, which you then submit to your lender. The bank inspects the work and, if everything checks out, releases the next portion of your loan. During construction, you generally only pay interest on the funds used, not the total loan amount.
This phased funding helps reduce financial pressure while ensuring the builder completes each milestone before receiving payment. If you’re dealing with a less experienced builder or are managing multiple contractors, this structure adds a layer of protection by keeping funding linked to progress.
Building vs Buying: A Different Financial Path
If you’re torn between building your dream home or buying something already built, it’s worth understanding how construction finance compares. While traditional home loans suit ready-built properties, construction finance is purpose-built for staged developments. It offers more flexibility during the design and build process and can be more cost-effective in the long run if done right.
For more on your options, including turnkey or project builds, visit our construction home loans page. You’ll find tailored advice to help determine whether building or buying is a better match for your lifestyle, budget, and timeline.
Key Advantages for Borrowers
Construction loans offer several benefits. First, you only pay interest on the money used, helping manage cash flow during the build. Second, progress payments mean your builder gets paid only after completing each phase, which encourages accountability. This funding model also works well if you’re planning a property development project, as it supports structured and strategic fund use.
Another benefit is the control you have over the build itself. From choosing your layout to materials and finishes, you can personalise the outcome to suit your long-term needs. With smart planning, you may even build in equity from day one – especially if property values rise during your construction period.
What You’ll Need to Apply
Lenders will want to see a fixed-price building contract, detailed construction plans, and council approvals. You’ll also need to work with a licensed builder – most banks won’t consider applications from owner-builders. Expect valuations at each drawdown stage and be prepared for delays caused by weather, labour shortages, or supply chain issues.
It’s also worth noting that the bank’s valuation might not always match your building contract. If the appraised value comes in lower, you may need to make up the shortfall from your own savings. Having a buffer built into your budget is essential when dealing with construction finance.
Including Land and Build in One Loan
Yes, you can combine both land purchase and construction costs into a single loan package. This is a popular approach among first-home builders and investors alike, streamlining the paperwork and improving cost transparency. It’s known as a ‘house and land’ package and can help you lock in prices early.
If you’re exploring mixed-use or commercial builds, we’ve broken that process down further on our commercial property loans guide. Commercial or semi-commercial builds come with added requirements, but similar principles apply – structured finance, staged funding, and detailed planning.
Pre-Approval Is Essential
Before signing anything with a builder, get pre-approved. This shows sellers and contractors you’re serious, and gives you a clear idea of your borrowing capacity. It also helps avoid nasty surprises if the bank later decides your project is too risky or over budget.
Pre-approval can also strengthen your position when negotiating with land developers or home builders. In competitive markets, being finance-ready can give you the edge over other buyers still scrambling for paperwork.
Ready to Build?
If you’re planning to build, renovate, or develop – a construction loan might be the right solution. But structuring the loan correctly is key. Speak to a broker who specialises in this space and can guide you through approvals, payments, and paperwork. The right setup can save you thousands and make the process far smoother.
Whether you’re breaking ground on a family home or building an investment portfolio, good advice makes all the difference. Reach out to get expert support tailored to your project.
Frequently Asked Questions About Construction Loans
How much can I borrow for a construction loan?
The amount you can borrow depends on your income, expenses, credit history, and the overall cost of the construction. Most lenders will assess your borrowing capacity using standard home loan criteria, but they’ll also factor in the cost of land, build, and any contingencies. A broker can help you calculate a realistic budget based on your specific project.
How much deposit do I need for a construction loan?
In most cases, you’ll need at least a 5–10% deposit of the total project cost (land + build). However, if you’re borrowing more than 80% of the value, you may also need to pay Lenders Mortgage Insurance (LMI). Each lender has slightly different criteria, so it pays to compare options or get advice from a construction loan specialist.
How long is a construction loan term?
Construction loans are usually short-term during the build phase – typically 12 months. Once construction is complete, the loan usually converts to a standard principal and interest mortgage, which can run for 25–30 years. Some lenders offer extensions if your build is delayed, but you’ll need to apply early.
How do I apply for a construction loan?
To apply, you’ll need a fixed-price building contract, council-approved plans, and proof of income. The lender will also order a valuation of the proposed build. It’s best to get pre-approval first to ensure you’re eligible before locking in contracts. A mortgage broker can walk you through the process and recommend lenders with favourable construction policies.