If you've bought a block of land and plan to build property on it, you'll probably need a construction loan and not a home loan.
A construction loan works differently to a home loan in that it releases the funds bit by bit as you reach each stage of building.
Construction loans are usually interest-only while the property is being build and they may have higher interest rates.
What is a construction loan?
If you want to build your own home on an empty block of land you'll need a construction loan rather than a normal home loan.
You can take out a separate land loan to buy the land and then take out a separate construction loan, but they can be bundled together.
With a construction loan your lender releases funds at each stage of the construction process rather than all of it upfront.
Construction loans can sometimes attract a higher interest rates so it's worth doing your research. Borrowers also need to provide more paperwork to the lender to show they have a council-approved building plan and a fixed 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 payments.
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 $350,000 house on a $600,000 block of land (total cost $950,000).
You buy the land first and your lender releases the amount required for your land purchase. Let's assume you have purchased your land with a 20% deposit, which means you have a loan of $480,000.
You are now paying interest only on the first $480,000.
Construction starts and your builder requires $100,000 to cover the foundations.
Your lender releases a further $100,000 of your funds to cover this. You're now paying interest on $580,000.
You continue borrowing instalments as construction progresses . Once completed, you've borrowed $830,000 which is $480,000 for the land and $350,000 for your construction.
Once your property has been completed you can now contact your lender to potentially revalue your newly completed home and ensure your repayments are now Principal & Interest.
How do repayments work on a construction loan?
Construction loan repayments are interest-only during the construction stage. And you only pay interest on the money you've drawn on to cover the next construction stage.
This means you're not repaying the full loan amount until you've moved in to the house.
Once construction is complete, you start making principal-and-interest repayments on the loan. This is when you start repaying the debt plus interest.
The benefit of this repayment structure is that your repayments during construction are minimal, because you only pay interest on the money you've spent.
What are drawdown fees?
Some lenders charge a drawdown fee for each stage of a construction loan. This means you pay a fee (typically around $100 – $200) when you access more of the loan at each stage of construction.
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
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.
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.
Expert insight: Ask yourself these questions
"Make sure that when you're going to a lender you've got a pretty good handle on their process for a construction loan.
Are their fees charged at valuation stages? Some banks want to do ongoing valuations at different stages of your construction. Some may charge valuation fees at certain milestones, so when the slab or the frames go up, for example.
How prompt are they in paying your builder? Because the last thing you want is your builder chasing up for progress payments as well.
Are you interest only for while the property completes? Most lenders will offer you interest only for that time of construction and then it rolls into a P&I loan. Then you've usually got a land loan and a construction loan, so if you want to have simplicity then you'll have to internally refinance to get the loan back into one singular payment once your property is completed."
With a construction loan you only pay interest charges at first, and only on the money you spent at each construction stage. This keeps your loan costs down during construction.
Once approved, you should begin construction as soon as possible. But most construction loans have some flexibility, allowing you to commence construction for several months or even a year from the approval date (or even longer).
While you have to pay stamp duty on the vacant land purchase, stamp duty doesn't apply to home construction. This is potentially a big saving.
Cons
Construction loans can have higher interest rates and may have more fees than standard home loans.
You'll need a contract with a licensed builder, a council-approved plan and builder's indemnity insurance.
Undecided on building your home?
Take a look at the difference in costs between building your home vs buying one outright.
A granny flat can give you extra living space and serve as an investment opportunity. As a property owner, there are various ways you can finance the construction of the flat using the equity in your home, including a construction loan.
The cost involved in adding a granny flat to your home varies depending on the type of granny flat you choose. If you're thinking of adding a granny flat to your property as part of a renovation or extension, then costs could head north of around $120,000. You'll also need to factor in engineering costs and possibly architect's fees, as well as money for any existing or potential hazards such as asbestos.
Pros of granny flat investment properties
Affordable investment. Buying or building a granny flat is usually cheaper than buying a standalone investment property, allowing you to start your investment portfolio without borrowing a huge amount of money.
Rental income. Depending on where you live and the size/features of the granny flat, your investment could provide several hundred dollars of rental income per week.
Adds value. A legally compliant granny flat will add to your property's total value.
Handy addition. If your circumstances change and you need somewhere for a relative or friend to live, your granny flat can provide the necessary accommodation.
Cons of granny flat investment properties
Tenants. You'll need to be prepared to deal with tenants living on your property, which could potentially lead to some tense and awkward situations.
Cost. The cost of constructing a granny flat may be more than you expect and the expenses can quickly add up.
Construction lending in Australia
In the 3 months to September 2025, Australians borrowed over $5.75bn in construction loans. This is a 24% drop in the value of construction loans borrowed in the same quarter in 2021 when there was considerably more construction taking place thanks to lower costs.
Collect documents. 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.
Complete application. You can usually apply for a construction loan on your chosen lender's website, or through a mortgage broker.
Lender assessment. The lender will examine all your documents and conduct a land valuation before (hopefully) approving your loan.
Lender approval. Once approved, construction can begin and your lender will release funds as needed (according to the agreed-upon building plan).
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.
Frequently asked questions about construction loans
Most construction loans give you up to 2 years to finish the construction of a new home. If you’ve purchased your vacant block of land as part of your construction loan, the time frame commences after your land purchase has settled.
There are times when you may want to include quotes from external contractors who aren’t with your builder as part of your total mortgage. This might include quotes for air conditioning, floor coverings, driveways, landscaping or a pergola to be added. Some banks will allow you to add individual quotes to your building pack or bank pack that your builder gave you, which lets you include those things in your mortgage amount. The progress draw payments remain the same to your builder, but the payment for those external quotes won’t happen until after the builder has been paid first and your house is at the practical completion stage.
Most builders try to offer "fixed price" contracts. While the cost of your new home construction won't change after this has been fixed for you, always be very wary of "variations" added to your final costs by the builder. These can include changes in the footings/foundation price after soil testing has been conducted.
If your contract includes a "TBA" or "NC" item listed anywhere, ask for verification about this. These are the builder's way of saying that your house price might be fixed, but there might be things that can change in cost that they won't guarantee.
Price increases can also include any upgrades you may have made during your colour selection process. This is when you arrive at various suppliers to choose your tiles, paint, bricks, roofing and other items that go into your house. Your building contract will include an allocation to cover these things, but if you spend more than you intended, your costs will go up.
Most banks are quite understanding about this and will expect that all those final variations have been received by the time your finance approval is underway. If there are any changes in pricing after this time, you may have to alert the bank to account for the extra, or you'll need to pay for them yourself.
Most banks and lenders will let you borrow up to 95% of the value of the land plus the construction costs. Note that this doesn’t say "95% of market value", as it would if you were buying an established home. Instead, banks use a "To be erected", or TBE valuation to determine what percentage of your costs you can borrow.
This means the bank will use the actual market value of your land, or the purchase price shown on the purchase contract, whichever is lower. Then it will add the exact cost of your construction to your land value to arrive at a TBE valuation amount.
This is not the same as the market value of your property once the construction has been completed. If you’re careful with your spending, it could be possible to pay less money constructing your home than it is actually worth in market value once it’s completed. If this is the case, it is very possible to have your newly built home re-valued 3 months after completion to maximise your equity. This is ideal if you intend to refinance after construction is finished to help pay for finishing touches to your home.
Yes, you can. In fact, almost all construction loans are set to interest-only payments during the progress draws period. Only after the construction is complete and the final drawdown payment has been made will your loan revert to a full principal and interest payment, unless you specifically request for it to stay on interest-only payments.
Most banks will allow you to make extra payments off your mortgage while your loan is still in the progress draws stage. Some banks will even let you link a 100% offset account to your mortgage account while it’s still being drawn down. This helps you get ahead on your mortgage while the balance is still low and reduces how much interest you’ll pay overall. Always check with your bank that they’ll allow this.
Building your own home can mean you get everything exactly the way you want it and with a construction loan you remain in control of the building process at every stage.
Many lenders offer pre-approval for construction loans. While it's not the same as full approval, you can get some confidence around how much you can borrow. You can get pre-approval before you have a contract with a builder of council-approved plans.
While some construction loan lenders will require at least a 20% deposit, you can still purchase with as little as a 5% deposit. If you are planning to build your first home you may still be eligible for government schemes like the First Home Loan Deposit Scheme.
These home loans offer low costs, coupled with a host of features, giving the best overall value.
7+
Great
These home loans may have slightly higher interest rates or fewer features but overall, a competitive offering.
5+
Standard
Usually the home loans would offer above average rates. They may still include some competitive features.
0+
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Higher costs and/or fewer features.
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The Finder Score crunches 7,000 home loans across 120+ lenders. It takes into account the product's interest rate, fees and features, as well as the type of loan eg investor, variable, fixed rate - this gives you a simple score out of 10.
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Richard Whitten is Finder’s Senior Money Editor, with over eight years of experience in home loans, property, credit cards and personal finance. His insights appear in top media outlets like Yahoo Finance, Money Magazine, and the Herald Sun, and he frequently offers expert commentary on television and radio, helping Australians navigate mortgages and property ownership. Richard started his career in education and textbook publishing in South Korea. He holds multiple industry certifications, including a Certificate IV in Mortgage Broking (RG 206) and Tier 1 and Tier 2 certifications (RG 146), as well as a Bachelor of Education from the University of Sydney and a Graduate Certificate in Communications from Deakin University.
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I am a builder by trade for the last 10 years, I have my own company and have been running that for the last 10 years, I have taken up full time employment with a roofing company as a site foreman and leading hand, I am on $140,000 per year and have $40,000 in savings, I am eligible for the first time home owners grant of $15000 and I want to borrow $250 to build as I have purchased land, are there any banks that will lend to me as most are treating me like an owner builder, but is my company which will be doing it not me??
Finder
ShirleyFebruary 17, 2015Finder
Hi Barclay,
Thanks for your question.
To be eligible for the First Homeowners Grant (FHOG), each applicant must be a natural person and not a company or trust. If you would like to build the property under your company’s name it is unlikely that you will be eligible for the grant.
There are a number of banks, especially major banks that would be willing to lend to you, though you would need to apply under your company and not a personal application. This would mean that an application in person would be preferable rather than an online one.
I also recommend getting in touch with a licensed mortgage broker. A broker can help you understand your financial position and they can leverage their panel of networks to find a lender that is more inclined to review your application.
Cheers,
Shirley
TroyJune 10, 2014
Hi if my broker or bank delay the progress payments during construction, who would be liable to pay the interest charged by the builder?
Finder
ShirleyJune 11, 2014Finder
Hi Troy,
Thanks for the question.
The borrower is liable for the interest. This is why it’s so important to find the right lender and to have everything planned out and prepared beforehand, with contingencies in place.
Speaking to a mortgage broker can help make this process a bit easier.
Cheers,
Shirley
Finder
MarcJune 11, 2014Finder
Hi Troy,
thanks for the question.
Unfortunately this will depend on why the delay has occurred, and who has caused it. I’d recommend contacting your broker first if there’s been a hold up in your funding to find out who, if anyone, is liable to pay any interest you’ve been charged as a result of any delays.
Cheers,
Marc.
RichieJune 10, 2014
Hi,
Will banks generally allow the owner to change the builder half way through the construction when the builder actually breached the contract terms by committing frauds (false invoices on a cost plus contract)?
Thank you
Finder
MarcJune 11, 2014Finder
Hi Richie,
thanks for the question.
As always, this will depend on the bank. Each lender will have their own policy for dealing with these types of unexpected matters. You might want to contact your lender directly to find out their policy in dealing with this.
Cheers,
Marc.
SimoneNovember 19, 2013
Hi will banks loan on land and construction to build to lock up stage only. My husband is a tradesmen and is able to complete inside himself hence saving us money. If yes how much will they loan of the construction cost to lock up stage?
Thank you
Finder
ShirleyNovember 19, 2013Finder
Hi Simone,
Thanks for your comment.
Generally, construction home loans are is paid progressively at key points, e.g. initial flooring, putting up the framework, house lock-up stage and then on completion. You may be able to negotiate with your lender that you only want to take out a construction loan up to the lock up stage.
If you need assistance with finding the right lender, a mortgage broker will be able to help you.
Cheers,
Shirley
kathySeptember 2, 2013
Hi,
My brother and I are first home buyers and are looking for a construction home loan.
what rates and fees should we be looking at when it comes to construction home loans?
Also do you have any recommended construction home loans?
Finder
ShirleySeptember 2, 2013Finder
Hi Kathy,
Thanks for your comment.
Generally standard fees apply to construction loans – these include application fees, valuation fees, settlement fees and exit fees. Interest rates are generally the same as well, but this will depend on your financial situation.
The information on this page may help you with making your decision.
Think you need a 20% deposit to buy a home? Think again. We break down no deposit home loans: how they work, who offers them, and what to watch out for.
Home loan cashback deals can help you refinance to a cheaper interest rate and get a lump sum cash payment. Compare the latest deals and check your eligibility today.
Learn how to compare rates to find the best home loan and start saving money on your mortgage today.
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I am a builder by trade for the last 10 years, I have my own company and have been running that for the last 10 years, I have taken up full time employment with a roofing company as a site foreman and leading hand, I am on $140,000 per year and have $40,000 in savings, I am eligible for the first time home owners grant of $15000 and I want to borrow $250 to build as I have purchased land, are there any banks that will lend to me as most are treating me like an owner builder, but is my company which will be doing it not me??
Hi Barclay,
Thanks for your question.
To be eligible for the First Homeowners Grant (FHOG), each applicant must be a natural person and not a company or trust. If you would like to build the property under your company’s name it is unlikely that you will be eligible for the grant.
There are a number of banks, especially major banks that would be willing to lend to you, though you would need to apply under your company and not a personal application. This would mean that an application in person would be preferable rather than an online one.
I also recommend getting in touch with a licensed mortgage broker. A broker can help you understand your financial position and they can leverage their panel of networks to find a lender that is more inclined to review your application.
Cheers,
Shirley
Hi if my broker or bank delay the progress payments during construction, who would be liable to pay the interest charged by the builder?
Hi Troy,
Thanks for the question.
The borrower is liable for the interest. This is why it’s so important to find the right lender and to have everything planned out and prepared beforehand, with contingencies in place.
Speaking to a mortgage broker can help make this process a bit easier.
Cheers,
Shirley
Hi Troy,
thanks for the question.
Unfortunately this will depend on why the delay has occurred, and who has caused it. I’d recommend contacting your broker first if there’s been a hold up in your funding to find out who, if anyone, is liable to pay any interest you’ve been charged as a result of any delays.
Cheers,
Marc.
Hi,
Will banks generally allow the owner to change the builder half way through the construction when the builder actually breached the contract terms by committing frauds (false invoices on a cost plus contract)?
Thank you
Hi Richie,
thanks for the question.
As always, this will depend on the bank. Each lender will have their own policy for dealing with these types of unexpected matters. You might want to contact your lender directly to find out their policy in dealing with this.
Cheers,
Marc.
Hi will banks loan on land and construction to build to lock up stage only. My husband is a tradesmen and is able to complete inside himself hence saving us money. If yes how much will they loan of the construction cost to lock up stage?
Thank you
Hi Simone,
Thanks for your comment.
Generally, construction home loans are is paid progressively at key points, e.g. initial flooring, putting up the framework, house lock-up stage and then on completion. You may be able to negotiate with your lender that you only want to take out a construction loan up to the lock up stage.
If you need assistance with finding the right lender, a mortgage broker will be able to help you.
Cheers,
Shirley
Hi,
My brother and I are first home buyers and are looking for a construction home loan.
what rates and fees should we be looking at when it comes to construction home loans?
Also do you have any recommended construction home loans?
Hi Kathy,
Thanks for your comment.
Generally standard fees apply to construction loans – these include application fees, valuation fees, settlement fees and exit fees. Interest rates are generally the same as well, but this will depend on your financial situation.
The information on this page may help you with making your decision.
Hope this helps,
Shirley