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Construction loans and owner builder mortgages

Learn how to build the home of your dreams and save on home loan interest while you do it.

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If you are looking to build your new home rather than buy an existing property, you need a different type of home loan known as a construction loan. A construction loan can also suit you if you are making major renovations to your existing home or to a property you have bought but which needs a bit (or a lot) of work before you call it home.

Compare home loans with construction options

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

Rates last updated April 4th, 2020
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Offset account
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Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
Adelaide Bank SmartFix Home Loan - 3 Year Fixed Rate (Owner Occupier, P&I)
$15 monthly ($180 p.a.)
A three year fixed rate loan with 100% offset account.
AMP Construction Loan - Owner Occupier (IO)
$10 monthly ($120 p.a.)
Build a home or investment property and take advantage of interest-only repayment options.
Adelaide Bank SmartFix Home Loan - 2 Year Fixed Rate (Owner Occupier, P&I)
$15 monthly ($180 p.a.)
Take advantage of a locked rate for two years and a full offset account.

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Credit services for Aussie Select, Aussie Activate and Aussie Elevate products are provided by AHL Investments Pty Ltd ACN 105 265 861 (“Aussie”) and its appointed credit representatives, Australian Credit Licence 246786. Credit for Aussie Select products is provided by Residential Mortgage Group Pty Ltd ACN 152 378 133, Australian Credit Licence 414133 (“RMG”). RMG is a wholly-owned subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL and Australian Credit Licence 234945. Credit for Aussie Activate products is provided by Pepper Finance Corporation Limited ACN 094 317 647 (“Pepper”). Pepper Group Limited ACN 094 317 665, Australian Credit Licence 286655 acts on behalf of Pepper. Credit services for Aussie Elevate products are provided by AHL Investments Pty Ltd ACN 105 265 861 Australian Credit Licence 246786 (“Aussie”) and its appointed credit representatives. Aussie is a trade mark of AHL Investments Pty Ltd ABN 27 105 265 861. Credit and any applicable offset accounts for Aussie Elevate are issued by Bendigo and Adelaide Bank Limited ABN 11 068 049 178 AFSL / Australian Credit Licence 237879.

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What is a construction loan?

A construction loan is a specific type of mortgage designed for people wanting to build a new home. Depending on the way a construction loan is set up, you may be able to purchase your vacant block of land first and then arrange to build on the land within a specified timeframe.

Construction loans aren't set up in quite the same way as a regular mortgage. Instead, the lender considers the total amount you need to borrow in order to pay your builder, and then breaks down the full amount into separate payments called progress draws. These are percentages of the total building contract amount paid out of your mortgage funds to the builder throughout the construction process.

Learn more about the construction process

While progress draws are being made, the majority of lenders will only expect you to pay the interest due on the amounts that have been drawn. 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 give their definitions of these loans

Owner builder mortgages

An owner builder mortgage is designed for those people who wish to build their own home without the help of a licensed builder. As banks and lenders use the property as security for your mortgage, many of them consider owner builder mortgages to be high risk. For this reason, many banks and lenders will not accept applications for these types of home loans.

Additionally, those 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, you should note that the actual completed value of the home is rarely taken into account when factoring in the value of the security property with owner builders. Instead, the lender will look closely at the quotes provided to form the estimated cost of materials and labour required to complete the construction.

Who needs a construction loan?

Construction loans are suitable for any borrower intending to build a new home on a vacant block of land. This includes buying a house and land package from a licensed builder, or conducting major renovations to an existing home, such as adding new rooms.

Property developers for small scale developments may also use construction loans, but these might only be available if you're building under a certain number of properties. If you're building a larger amount of properties (usually over four) most lenders will consider this to be larger-scale development, which will require commercial finance instead.

What you need to consider about construction loans

Due to the inherent risks involved for the lender, construction home loans are normally only offered to borrowers who have very good credit histories. The eligibility criteria is much more stringent for construction home loan applicants than it is for borrowers applying for a more traditional home loan. The initial down payment that is required is usually quite significant, especially if the building lot is not of great value without a building on it. Most lenders will want at least 20% of the total cost put down as a deposit.

But it's not just the cost you need to consider before choosing to build. There are a number of other factors you should be aware of when choosing a construction home loan:

  • Do I need to buy a house and land package to get a construction loan?

You don't technically need to buy a house and land package from one builder or developer to get a construction loan. You may have already purchased a vacant block of land earlier using a regular home loan. It's only when you sign a building contract with your licensed builder that you'll need a construction loan. Keep in mind that you will end up with two separate mortgages this way.

  • Do I have to use a licensed builder to construct my home?

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 for 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 license of your own, but an owner builder loan isn't suited to the faint of heart.

  • What clauses are involved with a construction loan?

In some states of Australia you are able to include a 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 (not at auction), where you're able to insert a clause that says "Subject to Finance".

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.

You may also be able to include specific dates and other information that is relevant to your clause. For example, you can add that your clause is subject to finance being approved with a specific lender for no more than a specific interest rate and that your finance approval needs to be received by a specific date. Remember, in this instance your finance approval is the full formal approval, or unconditional approval from your bank.

The primary reason for adding specific information like this is to protect you against having to accept finance that isn't right for you or your situation. So, if you've already received a pre-approval from your lender and you already know your interest rate, you can enter this information into your clause.

For example: This contract is subject to obtaining finance with Westpac at an interest rate no higher than 6.11% on or before 12th December.

If your finance clause is written this way, you have some backup in case your bank suddenly decides to decline your mortgage application at the last minute. After all, if you've simply written "Subject to Finance" and nothing else, you might suddenly find that the vendor can insist you accept any finance at ridiculous interest rates just to comply with the contract.

  • What if a building contract changes?

There are some cases where a lender will make a construction loan more expensive. This is due to how the contract price might go up after you get an amendment on your home prepared. This can especially be difficult because the builder will end up having to reassess the value of the loan from the top. However, you can do a few things in order to keep this from being a problem down the road.

  • Get your building contract completed and finalised before sending it to your lender.
  • Pay for any new changes to your construction with your own money. You could also ask your builder to reimburse you in the event that you got any discounts out of something.
  • Consult your lender if the changes are massive. You might need to wait a month for the lender to review the loan again.
  • Be sure to simplify your changes. This is so it will be easier for the bank to make changes and to keep from being delayed in the process.

How to choose a construction loan

Just like a regular home loan, the way you compare a construction loan will have an impact on the value you get out of it. Here's what you should compare:

  • Interest rates. You'll only be paying interest during the construction period, meaning the interest rate you receive will have an important bearing on the size of your repayments. Keep in mind that the advertised rate doesn't take into account the fees you will pay for the loan, so be sure to also look at the comparison rate, as this will have an impact on this.
  • Fees. Some construction loans will have extra fees which they'll charge to cover the costs of having a valuer check your property after each stage of the building is completed. Some home loans can also charge extra administration fees for construction loans, so you may need to factor this into the total cost of your home loan. These fees are in addition to regular upfront fees such as application costs, valuation fees and more.
  • Features. During the construction phase most features of your home loan will be unavailable, such as redraw and the ability to make additional repayments (this of course will depend on the particular loan), but it still pays to know what features you'll be able to use once the construction phase ends. Find out what features you want out of your home loan and then ensure you search for these during your comparison.
  • Construction terms. You'll want to confirm what construction terms your loan will offer, including how long you can build for using the loan and the process for drawing down and accessing funds.

Tips to follow when building a home

FAQs about construction loans

How much time do I have to construct my home?

Most construction loans give you up to two 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.

How does a construction loan work?

While your full mortgage amount might be approved to cover the cost of the construction, the progress payments are divided into usually five portions. These are broken down to be paid to the builder after the completion of various stages of the construction. The exact proportion of your contract amount to be paid with each progress payment will be detailed in your building contract.

During the construction process, you are only expected to pay the interest due on the amount of money that has been drawn from your loan. When the construction is complete, your construction loan will revert to a regular mortgage with full principal and interest repayments.

What is a progress draw payment, or draw down?

During the construction process, your bank will pay your builder for each individual stage of work completed after it’s been done. Each individual payment is known as a ‘draw down’, or a progress payment.

Can I add external quotes to my construction loan?

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 or pergolas 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 practical completion stage.

What happens if my building costs go up?

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 selections 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. Any changes in pricing after this time may require you to alert the bank to account for the extra, or they’ll need to be paid by you.

What percentage of the building costs am I able to borrow?

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 they’ll 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 three 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.

What if my builder goes broke?

All builders in Australia are required to have adequate insurance to cover against this happening. If your builder does happen to go broke before your construction is complete, another builder can be appointed to complete the home. The insurance company will pay for any difference in costs that may arise.

Can I get an interest-only construction loan?

Yes, of course. 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 draw down 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.

Can I pay extra payments during the progress draw period?

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.

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UBank UHomeLoan Variable Rate - Discount offer for Owner Occupiers, P&I Borrowing over $200,000

Take advantage of a low-fee mortgage with a special interest rate of just 2.59% p.a. and a 2.59% p.a. comparison rate.

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HSBC Home Value Loan - Promotional Offer (Owner Occupier P&I)

Get a low interest rate loan with no ongoing fees. Plus you can make extra repayments and free redraw online.

Logo for Suncorp Back to Basics Home Loan - Better Together Special Offer $150k+ LVR<=90% Incl. LMI (Owner Occupier, P&I)
Suncorp Back to Basics Home Loan - Better Together Special Offer $150k+ LVR<=90% Incl. LMI (Owner Occupier, P&I)

Get one free online redraw per month and pay no ongoing fees. Application fees are waived for loans above $150,000.

Logo for Essentials - Variable (Owner Occupier, P&I) Essentials - Variable (Owner Occupier, P&I)

A competitive interest rate home loan with interest only options. Interest rate 2.79% p.a.
comp rate of 2.81% p.a.

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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 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 this page on how 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 by 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 you need to speak to a mortgage specialist for further assistance, you can inquire on this page.

      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 options for 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 regular source of income, a 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 find this article helpful.

      I hope that helps.


  6. Default Gravatar
    PatApril 18, 2016

    We wish to build a house on a block of land that we own. We are living in our present home which we have paid off and wish to do so until our new house is completed. We would like to get a construction loan to finance the building of the new house, then sell our present house to pay off the loan completely. The time frame we are looking at is around 12 months. Is it possible to do this with a construction loan paying interest only and how would the interest be calculated. We are looking at borrowing $700.00 to finance the build.

    • Avatarfinder Customer Care
      BelindaApril 19, 2016Staff

      Hi Pat,

      Thanks for reaching out.

      This may be possible depending on the way that the construction loan is set up. Generally, the lender considers the total amount you need to borrow, and then breaks down the full amount into separate payments.

      While progress draws are being made, most lenders will only expect you to pay the interest due on the amounts that have been drawn. Your principal and interest repayments won’t normally start until after the handover has taken place.

      However, the structure of a construction loan and the way that the interest is calculated will depend on the lender’s individual criteria. It would be best to speak to a mortgage broker or to a lender directly to discuss the construction and loan terms.

      All the best,

  7. Default Gravatar
    ercarol5February 5, 2016

    i’m looking to get a construction loan for up to $700K at 95%; i have 5% savings towards the required amount above. i recntly settled on the land at 20% deposit and hoping that i could apply for the construction loan straight away as the house plan is ready and contract plus minimum deposit of 5% is also ready; what is my chance of success to raise the required loan amonut? i understand i’d need a LMI which can be stricter in assessment. my credit history is near perfect, apart from two recent dishonoured payment as a result of lack of fund in the account even though there’s evidence of good account balance for other linked account. thanks for your advise.

    • Avatarfinder Customer Care
      BelindaFebruary 5, 2016Staff

      Hi Ercarol5,

      Thanks for reaching out.

      You’ve come through to a financial comparison website- so we cannot comment on whether or not you’ll qualify for a loan as this will depend on the lender’s eligibility criteria for a specific construction or owner-builder loan.

      Due to the inherent risk of construction loans, most lenders have more stringent criteria for this type of product and they generally only offer these loans to borrowers with good credit histories and those that are in a sound financial position.

      You can compare construction loans in the above table, where you’ll see that it is possible to apply for a construction loan with 95% loan-to-value ratio (LVR). As you mentioned, you will need to pay lender’s mortgage insurance (LMI) which can be highly costly.

      Ultimately, the lender will review your income, assets, debts and any liabilities that you have in order to determine whether or not you can comfortably repay the loan. It would be best to contact your chosen lender directly, or to speak to a licensed mortgage broker, to discuss your borrowing options.


  8. Default Gravatar
    BitiSeptember 7, 2015

    When do the lenders need deposit in land and construction loan? If I pay 5% of the land value when the bank takes the rest of the deposit for construction

    • Avatarfinder Customer Care
      BelindaSeptember 8, 2015Staff

      Hi Biti,

      Thanks for your enquiry.

      Generally, lenders require you to complete a 20% deposit for land and construction home loans but this will depend on the specific lender. In the comparison table above on this page, you can compare a range of brands and under “LVR” you can see how much each lender will let you borrow, and subsequently, the amount of deposit required.

      If you’d like to apply for one of these loans, you can click on the “go to site” button to be redirected to their website.

      Kind regards,

  9. Default Gravatar
    nicoleAugust 31, 2015

    We want to buy land in rural living area 3.3 acres and put water power septic and a shed its affordable but we have not much deposit what can we do thanks

    • Avatarfinder Customer Care
      BelindaSeptember 1, 2015Staff

      Hi Nicole,

      Thanks for your enquiry.

      Above on this page you can use the table to compare a range of construction and owner-builder home loans. You might also be interested to read about vacant land home loans on this page where you can learn about some lenders that offer these types of loans.

      Please note that lenders generally take a conservative approach towards both construction and vacant land home loans and as a result you will generally need to save more for a deposit before you can be approved. As a rule of thumb, you should try to complete at least a 20% deposit.


  10. Default Gravatar
    constanceAugust 26, 2015

    I would like to build an inlaw suite attached to my daughters home. I want to borrow 60,000. My credit score is 600- is there a type of loan I am able to get – I would like a monthly payment no more than 500/mo 15 years-is this possible thanks constance

    • Avatarfinder Customer Care
      BelindaAugust 26, 2015Staff

      Hi Constance,

      Thanks for your enquiry. is an online comparison website so we can’t provide individual financial advice or recommend specific home loans to you.

      However, above on this page you can compare a range of construction loans and you can click on the ‘go to site’ button to learn more about the features and terms of these loans. You can also fill out the form to speak with a mortgage broker to discuss your options.


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