Construction Loans from 6.49% p.a.

How Construction Loans 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 standard drawdown stages recognised by most lenders follow the typical construction timeline. The first drawdown covers the slab or base stage, representing about 15-20% of the total build cost. This payment is released once the concrete slab or foundations are poured and inspected. The second stage covers the frame, released when the structural framing, roof trusses, and roofing are complete. The third stage is lock-up, when external walls, windows, doors, and roofing are installed and the building is weatherproof. The fourth stage covers internal fit-out including plastering, cabinetry, benchtops, and internal fixtures. The final drawdown covers the completion stage, typically 5-10% of the contract, released when the build is finished and a certificate of occupancy is issued.

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.

Land and Build Packages

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.

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.

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.

Builder Requirements and Fixed-Price Contracts

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.

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, 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.

Interest-Only 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.

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.

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 at this stage to access the best available rate for your now-completed property, which may be valued higher than the construction cost.