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Construction loans

Get a competitive construction loan to build the home of your dreams and learn how the construction finance process works (it's different to a normal home loan).

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What you need to know:

  • Construction loans can finance the building of a new home or major renovations.
  • Funds are released in stages as construction progresses.
  • You need a contract from a licensed builder before getting a loan approved.

Compare construction loan rates

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Name Product Interest Rate (p.a.) Comp. Rate p.a. Fees Monthly Payment

loans.com.au Green Home Loan IOHome≥ 10% Deposit

loans.com.au Green Home Loan
  • App: $0
  • Ongoing: $0 p.a.
Construction loan. This loan is available for borrowers building a home with a NatHERS rating of 7.0 or higher. A competitive variable rate construction loan available to build an energy-efficient home.

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*Note that while the loans below offer construction options, this may change the rates or fees displayed below.

What is a construction loan?

Most Australian borrowers purchase existing homes and borrow the money to pay for them with home loans. But if you want to build your own home on an empty block of land you'll need a construction loan.

You can use a construction loan to cover the cost of both buying a block of land and the construction, or just the construction itself.

Construction loans tend to have higher interest rates than standard residential loans. Borrowers also need to provide more paperwork to the lender to show they have a solid building plan and a contract with a licensed builder.

How do construction loans work?

With a construction loan, your lender considers the total amount you need to borrow in order to pay your builder. Then it breaks down the full amount into separate payments called progress draws.

You receive a payment at the completion of each stage of the construction project rather than all at once. Repayments at this stage are usually interest-only. You don't start paying off the loan principal until the house is complete.

Here's a quick example:

  • You're building a $375,000 house on a $125,000 block of land (total cost $500,000).
  • You buy the land first and your lender releases $125,000 to cover the cost.
  • You are now repaying 25% of the loan according to the loan's interest rate.
  • Construction starts and your builder requires $100,000 to cover the foundations.
  • Your lender releases a further 20% of your funds to cover this. You're now repaying 45% of the total loan amount, plus interest.
  • You continue borrowing instalments until construction progresses. Once completed, you're borrowing (and repaying) the full amount.

The more you borrow or draw down throughout the process, the higher your repayments become. Your full principal and interest payments won't begin until after the handover has taken place and you have received the keys to your new home, meaning you save on interest during the construction process.

Construction loans: 3 experts explain construction finance

What kind of borrowers need a construction loan?

Constructions loans are a suitable mortgage for:

  • Owner-occupiers buying land to build their own homes to live in
  • Owner-occupiers building homes on land they already own
  • Existing home owners looking to make substantial renovations
  • Investors looking to build a new investment property
  • Owner-builders looking to construct a house themselves

Owner builder mortgages

You can get a construction loan as an owner-builder but it is much harder. The vast majority of banks and lenders will prefer that you choose a licensed builder to construct your home before they extend a construction loan to you.

However, there are some lenders that will allow you to build your own home as an owner-builder. This is ideal if you're a qualified tradesperson or if you have a building licence of your own, but an owner-builder loan isn't suited to the faint of heart.

How to apply for construction finance

Getting a construction loan approved takes a bit more paperwork than other home loans. Here's a rough outline of the process:

  1. Start by comparing construction loan rates from multiple lenders (see the table above) to get a competitive deal.
  2. Work out roughly how much you can afford to borrow for your construction loan, based on your income.
  3. Before applying, make sure you have evidence of your income and expenses, a detailed building plan (with council approval), a contract from a licensed builder and proof that your builder has the necessary builder's insurance.
  4. When you've found the right loan and gathered your documents, you can submit an application.
  5. The lender will examine all your documents and conduct a land valuation before (hopefully) approving your loan.
  6. Once approved, construction can begin and your lender will release funds as needed (according to the agreed-upon building plan).

Understanding the 5 steps of a construction loan

With construction loans, funds are paid in stages known as progress draws. These stages correspond to the progress of your home's construction. They can vary a little depending on your builder and lender, but generally are as follows:

1. Foundations and footings

  • The building site is cleared of any vegetation and debris, and is levelled. Footings for your house are installed and spaces are cut out for the site's plumbing.
  • During this time, the concrete slab for your house will be poured. After this, initial plumbing and waterproofing will be installed.

2. Frame-up and brickwork

  • The framework, trusses, roof and windows will be constructed. If your home has brickwork, this will be partially done.
  • Gutters and insulation will also go in at this stage, as will any conduits for plumbing or electrical work.
  • At the completion of this stage, the second progress payment will be made.

3. Lock-up stage

  • During the lock-up stage of construction, doors and windows will be installed. All exterior walls will also be completed.
  • At the end of the lock-up stage, your home will be sealed and protected from the elements.
  • Your lender will make the third progress draw payment to your builder. This is one of the most significant drawdowns, often making up 20–35% of the total building funds.

4. Fit-out

  • At the fit-out stage of construction, all fixtures, fittings and appliances will be added.
  • Plumbing and electrical work is completed, gutters and downpipes are installed, skirting boards, cornices and architraves are added, kitchen benches and cupboards are put in and shower screens, mirrors, sinks, toilets and faucets are installed.
  • At the end of this stage, your lender will make the fourth progress payment to your builder.

5. Practical completion

  • Your home is almost finished. Your builder will work on the finishing touches, including painting, any final electrical or plumbing work, final installations of appliances and any other detailing.
  • At the end of this stage, which can take up to 8 weeks, you'll do a final walkthrough of your property to identify any problems, and the builder will walk you through the property's features.
  • Your lender will also do a final inspection before disbursing the final progress drawdown. After this stage, your construction home loan will also be converted into a traditional home loan.

Construction loan contracts

Construction loan contracts are a bit more complicated than other loan contracts. With any property transaction, you should always have an expert solicitor or conveyancer review any contracts before you sign them.

What clauses are involved with a construction loan?

In some states of Australia you are able to include a subject to finance clause when you sign your contract for your vacant block of land. This type of clause is quite common when purchasing vacant land or even an established home via private treaty sale.

The ability to include a finance clause like this gives you several benefits:

  • It helps to protect you against being forced to take out finance that isn't suited to you.
  • It allows you to get out of your contractual obligation if your finance application doesn't get approved for whatever reason.
  • It removes your block of land from the market while the agent waits to hear about your finance approval.
  • It gives you time to obtain your finance.

Frequently asked questions

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49 Responses

  1. Default Gravatar
    SueApril 8, 2018

    Hello, we have bought a block with cash with another couple. There is no money owed at all by anyone. There are two couples, four people on the title. We plan to build two townhouses and subdivide the block in half. The property would temporarily be on two titles. My question is- I have approx half the cash needed for the build. We will need to apply for a construction loan to obtain the additional funds to build the home. Is it possible to obtain a construction loan for our townhouse whilst there are four names on the title. Both couples are building at the same time using the same builder. Plans have been drawn up together and been passed at council together.
    Thank you- I desperately need some suggestion about the best way to do this.

    • Default Gravatar
      BalaMay 17, 2018

      It is possible to get separate loans for the construction for both couples and you both will be responsible for your own portion of the loan repayments, provided we use the same lender and the same builder to build both properties, cross collateral will be required. Both couples will need to be guarantors on loans ie Couple A will need to be Guarantors on couple B loan and vice versa. Thanking you. Bala

    • Avatarfinder Customer Care
      MayMay 18, 2018Staff

      Hi Bala,

      Thanks for your inquiry.

      The approval of your (and husband’s) separate construction loan will depend entirely on the lender based on their assessment of both of your overall financial situations, including but not limited to both your income, liabilities, assets, credit history, etc. In the case of guarantor loans, the lender will also assess if your guarantor also meets the criteria. Not sure though if you two can be a guarantor for each other’s loan. You can find a full guide on how a guarantor loan works.

      I suggest that you speak to a mortgage broker who can take your circumstances into account as they can find a suitable construction loan for you and your husband.


    • Avatarfinder Customer Care
      MayApril 9, 2018Staff

      Hi Sue,

      Thank you for your question.

      It would be best to speak to all the persons whose names are on the title so they would know that you’ll be using the title to secure a loan. I would suggest that you speak to the lender directly as well about this so they can arrange the mortgage according to your situation. In any case, best to get a legal advice on this too to avoid future problems.

      Meantime, there are construction home loan brands listed above which you can contact with and discuss your options for a loan and your situation.


  2. Default Gravatar
    DionOctober 3, 2017

    Hi Finder!

    I am interested in buying land from an Estate, and once titles are received, build a house on top. What respective loans would I need to apply for to make this happen?


    • Default Gravatar
      DanielleOctober 4, 2017

      Hi Dion,

      Thank you for contacting finder. We are a comparison website and general information service, we’re more than happy to offer general advice.

      You are on the right page. You may review and compare the offers available on the table. Once you have selected one, you may proceed by clicking the green “Enquire Now” button. And if you scroll down you’ll find more information regarding these types of loans so it should serve as a reference guide.

      I hope this helps.


  3. Default Gravatar
    KenJuly 7, 2017

    Hi Guys, I have purchased a property which I paid 20% deposit with a mortgage of $600K. I am currently drawing plans to build a new house on this block, I have $120K savings and need a further $450K to complete build, so total will be $1.05M. Will a bank lend us the 450K on existing mortgage to start building? Will they combine it once the build is complete? We will have no issue serving the size of the debt.
    Cheers Ken

    • Default Gravatar
      JonathanJuly 11, 2017

      Hi Ken!

      Thanks for the comment. :)

      As long as your credit resources are able to meet the qualifications of the lenders, why not? As for combining the loans, usually it is not. You would have two separate mortgages if that happens, one regular home loan and another one for construction loan.

      If this interests you, please learn more about mortgage brokers and how they can help you.

      Hope this helps.


  4. Default Gravatar
    DavidMay 18, 2017

    I want to build a house to create equity and sell it. I have only $60k in savings, but would need double that to meet the 80% LVR of what I have in mind. Are there any lenders for residential investors like me who will lend against the completed value of the property? This would solve my problem of having less than 20% as a deposit.

    • Avatarfinder Customer Care
      DeeMay 28, 2017Staff

      Hi David,

      Thanks for your question.

      Kindly note that lenders that do offer owner builder mortgages will usually limit the loan amount to 60% of the total land value and construction cost. The lender will take into account the value of the vacant land as part of the valuation total. However, the actual completed value of the home is rarely taken into account when factoring in the value of the security property with owner builders.

      You may have to directly get in touch with the lenders listed on the page to confirm if they consider the completed value of the property in connection to your loan application.


  5. Default Gravatar
    LynNovember 4, 2016

    I own a block of land outright and wish to build a house on it. The house cost will be somewhere around 160K of which I have 80K. Therefore the construction loan I require would be for 80K approx. The problem I have is that I am an aged pensioner. (67 yo). Is it still possible to get a loan?

    • Avatarfinder Customer Care
      HaroldNovember 4, 2016Staff

      Hello Lyn,

      Thank you for your question.

      There are possible options you may explore if you want to find home loans For pensioners. For eligibility requirements, some home loans will require you to meet certain eligibilities in order to take out that home loan. This may include a regular source of income, good credit history, and more. Pensioners in particular should compare the eligibility requirements of home loans because some may be more appropriate to apply for than others. Also, you may check pensioner loans if you wish to check other possible options.

      I hope that helps.


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