Construction loans

How does a construction loan work?

A construction loan differs from a standard home loan in one fundamental way: instead of receiving the full loan amount at settlement, funds are released progressively as your build advances through defined stages. This progressive drawdown structure means you only pay interest on the money that has actually been released to your builder, keeping your costs manageable during what is typically a 6-12 month construction period.

The five drawdown stages

The standard drawdown stages recognised by most lenders follow the typical construction timeline:

1. Slab or base: about 15-20% of the total build cost, released once the concrete slab or foundations are poured and inspected.
2. Frame: about 20-25%, released when the structural framing, roof trusses, and roofing are complete.
3. Lock-up: about 20-25%, when external walls, windows, doors, and roofing are installed and the building is weatherproof.
4. Fit-out: about 15-20%, covering internal fit-out including plastering, cabinetry, benchtops, and internal fixtures.
5. Completion: typically 5-10% of the contract, released when the build is finished and a certificate of occupancy is issued.

Progress inspections before each payment

Before each drawdown is released, your lender arranges a progress inspection. A qualified valuer attends the site to confirm the work matches the stage claimed and the quality meets acceptable standards. This protects both you and the lender by ensuring funds are only released for completed work.

How do the major lenders handle construction loans?

Every major lender releases funds in stages against completed work; the differences are in what triggers a payment, how long you have to build, and whether an owner-builder is accepted. Checked against each lender's published product page on 19 September 2026. Terms change without notice; confirm the current position with the lender or your broker before relying on it. Where a lender does not publish a figure the cell says so.

How do land and build packages work?

If you are buying land and building on it, a land and build construction loan covers both stages in a single facility. The loan is structured in two parts: the land component is released at settlement when you purchase the block, and the construction component is drawn progressively as described above.

House and land packages

Many developers and builders offer integrated land and house packages where you purchase a block in a new estate and engage the developer's preferred builder. These packages can simplify the lending process because the total cost is known upfront and the builder is already established with many lenders. However, you are not limited to package deals, you can purchase land independently and engage your own builder.

Buying the land first

When purchasing land first with the intention to build later, some lenders will provide a land loan initially and then convert it to a construction loan when you are ready to build. Others prefer to approve the entire package upfront, with the construction component activated when you submit your building contract and plans.

What does the lender need from your builder?

Lenders impose requirements on the builder you engage to protect their security and your investment. At a minimum, your builder must hold a current and appropriate builder's licence for your state, carry adequate public liability and builder's warranty insurance, and be in good financial standing. Most lenders maintain lists of approved builders, but will also assess new builders on a case-by-case basis. If you plan to manage the build yourself, the owner-builder loans guide covers which lenders consider it.

Fixed-price contracts

A fixed-price building contract is strongly preferred, and often required, by most lenders. A fixed-price contract sets out the total cost of the build, including all inclusions and specifications, with limited scope for price increases. This gives the lender confidence that the approved loan amount will cover the full construction cost, and protects you from unexpected cost blowouts.

Cost-plus contracts

Cost-plus contracts, where you pay the actual cost of materials and labour plus a builder's margin, are harder to finance because the total cost is uncertain. If you are working with a cost-plus arrangement, expect lenders to require a larger contingency buffer (typically 10-15% above the estimated cost) and a higher deposit.

What do you pay during construction?

During the construction phase, your loan operates on an interest-only basis. You pay interest each month on the cumulative amount that has been drawn down, not on the total approved loan. This means your repayments start very low and gradually increase as more funds are released.

A worked example

For example, on a $500,000 construction loan at 6.49%, after the first drawdown of $100,000 (slab stage), your monthly interest payment would be approximately $541. After the second drawdown totalling $250,000, your payment rises to about $1,352. At the completion of the build with the full $500,000 drawn, your interest-only payment is approximately $2,704 per month.

When the build is finished

Once construction is complete and the final inspection is passed, your loan converts to a standard home loan. At this point, you begin making principal and interest repayments over the remaining loan term. You can also choose to refinance your home loan at this stage to access the best available rate for your now-completed property, which may be valued higher than the construction cost.