Construction Loans
A construction loan is designed for building a new home or undertaking substantial renovations. Rather than receiving the full loan amount upfront, funds are released in stages as the build progresses, and you only pay interest on the amount drawn down so far.
How a construction loan works
The loan is paid out in stages, typically tied to standard building milestones: slab, frame, lock-up, fixing, and completion. At each stage, your builder submits an invoice, and the lender releases the corresponding portion of funds directly, often after an inspection confirms the work matches the claimed progress. You pay interest only on the amount drawn so far, not the full approved loan amount, which keeps repayments lower during the build.
What lenders typically require
- A fixed-price building contract from a licensed builder
- Council-approved plans and permits
- A detailed schedule of stages with corresponding payment amounts
- Builder’s insurance and, in most states, home warranty insurance
Lenders assess construction loans more thoroughly than a standard purchase, since they’re funding an asset that doesn’t fully exist yet.
Once construction finishes
When the build is complete and the final drawdown occurs, the loan converts to a standard principal-and-interest (or interest-only, if arranged) home loan, and full repayments begin on the total amount borrowed.
Key risks to plan for
- Delays extend the drawdown period, and interest continues accruing throughout, budget for the possibility of a longer build than planned
- Cost overruns beyond the fixed-price contract can leave a funding gap the loan won’t automatically cover, you’d need to fund the difference yourself
- Builder insolvency mid-build is a real risk in the construction industry, home warranty insurance exists specifically to provide some protection here
Home warranty insurance rules differ by state, so check your state government’s building or fair trading website for how it works where you’re building.
Who a construction loan suits
- Anyone building a new home from the ground up
- Owners undertaking substantial structural renovations, rather than minor cosmetic work
- Borrowers working with a licensed builder on a fixed-price contract, rather than an informal or unlicensed arrangement
FAQ
No, most construction loans only charge interest on the amount drawn down at each stage, so repayments during the build are typically lower than they’ll be once the loan converts to full principal-and-interest repayments.
You’re responsible for funding the shortfall yourself, either from savings or a separate arrangement, the construction loan is fixed to the approved contract amount and doesn’t automatically expand to cover overruns.
Yes, for substantial structural renovations, though minor cosmetic renovations are usually better suited to a standard home loan top-up or a personal loan, since the staged drawdown process adds complexity that isn’t necessary for smaller jobs.