- Level 2
1/3 Janefield Dr
Bundoora VIC 3083 - Monday to Friday
8:30 AM – 6:00 PM - Call Us Now
1300 188 808
By Nojan Rahimi, principal broker at Blutin Finance — 14+ years in finance, including 8+ years as a specialist mortgage broker, MFAA-accredited.
A construction loan funds a home as it’s built, releasing the money in stages instead of one lump sum. As each stage of the build is finished, the lender pays a portion to your builder, and you pay interest only on the amount drawn so far. When the build is complete, the loan converts to a standard principal-and-interest home loan.
This guide walks through how that works in practice: the build stages, the progress payments, what you actually pay during construction, the documents lenders need, and what happens at handover.
A construction loan is built for one job: paying for a home as it’s built, rather than buying one that already exists.
A standard home loan hands over the full amount at settlement. A construction loan doesn’t. It releases the money in instalments, called progress payments or drawdowns, tied to each stage of the build. You pay interest only on what’s been drawn, so repayments start small and grow as the build progresses.
It suits a few situations: a new build on land you own, a house-and-land package, a knock-down rebuild, or a major structural renovation such as adding a second storey or moving load-bearing walls. If you’re buying an established home, a standard home loan is the right tool, not this one.
Most construction loans release funds across five or six stages, each tied to a milestone the builder reaches. The lender pays the builder directly after confirming the stage is done.
The stages, and the rough share of the build cost each one tends to represent, look like this:
Treat those percentages as a guide, not a rule. The exact split varies by builder and lender, and it’s set out in your building contract’s progress-payment schedule. What stays constant is the principle: money is released stage by stage, against work that has actually been done.
One distinction worth getting straight early. That first deposit is the builder’s deposit, a slice of the contract price to get things moving. It’s separate from your loan deposit, the equity you contribute, which is covered under eligibility further down.
The first drawdown carries the most conditions. Before a lender releases anything, it usually needs a signed fixed-price building contract, council-approved plans, the builder’s insurances in place, and the loan formally settled. Once those are confirmed, the first payment is released.
After that, each drawdown follows the same rhythm. Your builder finishes a stage and issues an invoice. You authorise it, the lender often sends a valuer to confirm the work matches the claim, and the funds are released to the builder. You approve every invoice before money moves, which keeps you in control of the schedule. Never sign off on work you haven’t checked.
The final payment has its own checklist. The lender arranges a final inspection or valuation, you provide the occupancy certificate, and the builder issues their final invoice. Minor cosmetic defects usually go on a punch list and don’t hold up the final payment, as long as the home is habitable. When everything lines up, the last drawdown is released and the build is paid in full.
During construction you pay interest only, and only on the money drawn so far. Interest is calculated daily on the drawn balance and charged monthly, so your repayment climbs each time a new stage is funded.
This is the normal structure for a construction loan, not an optional extra. You’re not paying down the principal yet because the home isn’t finished, so the lender charges interest-only on what’s been released and nothing more.
Here’s how that plays out on a $600,000 construction loan, at an illustrative rate of 6.50% p.a. Construction rates are typically a little higher than standard variable home loan rates, so treat this figure as a round number to show the mechanics, not a current market quote.
Stage | Cumulative drawn | Approx. monthly interest |
Deposit (5%) | $30,000 | ~$163 |
Base / slab (to 20%) | $120,000 | ~$650 |
Frame (to 40%) | $240,000 | ~$1,300 |
Lock-up (to 60%) | $360,000 | ~$1,950 |
Fit-out (to 85%) | $510,000 | ~$2,763 |
Completion (to 100%) | $600,000 | ~$3,250 |
The pattern is the point. Early on you’re paying interest on a small drawn balance, so repayments are low. By completion you’re paying interest on the full $600,000. Over a typical nine-to-twelve-month build, paying interest only on the drawn balance, instead of on the whole loan from day one, saves a meaningful amount.
Some lenders also let you make extra repayments during the build, which chips away at the drawn balance and the interest charged on it. Worth asking about if you expect spare cash while the home goes up.
Yes, an offset account can reduce the interest you pay during the build. Money sitting in the offset is subtracted from your drawn balance before interest is calculated. Draw $240,000 and hold $20,000 in offset, and you’re charged interest on $220,000.
Two caveats. Not every lender offers an offset on a construction loan, and some that do charge a monthly or annual fee for the feature. Whether it’s worth it depends on how much cash you’ll realistically keep in the account while the build runs.
If you don’t already own the land, you have two paths.
The first is a standalone land loan to buy the block, then a separate construction loan once you’re ready to build. This suits people who want to secure land now and build later. It means two applications, and potentially two sets of fees.
The second is a single land-and-construction approval that covers both in one application. The land settles first, then the construction portion draws down in stages as the build proceeds. Lenders offering this usually want your fixed-price contract within a set window.
Either way, lenders attach timing conditions. They typically expect the first construction drawdown within 6 to 12 months of approval, and the build completed within about 24 months of that first drawdown. Both are subject to lender policy, so confirm the windows before you commit to a settlement date on the land. Before you buy a block, also weigh the estate’s design guidelines, council rules, and site costs, which can move the budget more than people expect.
Construction lending comes with more paperwork than a standard home loan, because the lender is funding something that doesn’t exist yet. Expect to provide:
The lender also orders an “on-completion” valuation: an assessment of what the property will be worth once finished, based on the plans and contract. That figure drives how much the lender will lend, and whether Lenders Mortgage Insurance applies.
Some people want to manage the build themselves rather than engage a licensed building company. That’s an owner-builder arrangement, and lenders treat it as higher risk.
Expect stricter scrutiny: more documentation, a larger deposit, often a lower maximum loan, and sometimes a higher rate. Some lenders won’t fund owner-builders at all. The logic is that a licensed builder under a fixed-price contract gives the lender a known cost and a party carrying the build risk, and an owner-builder gives them neither. If you’re weighing it up, check which lenders will even consider the application before you plan around it.
Lenders strongly prefer a fixed-price building contract, and many won’t fund a build without one. A fixed-price contract sets the total cost up front, which gives the lender certainty about the amount it’s funding, and puts the risk of cost overruns on the builder rather than you.
The alternative, a cost-plus contract, charges the actual cost of labour and materials plus the builder’s margin, with no fixed total. It offers flexibility, but the open-ended cost makes lenders nervous, and finance is harder to arrange.
Whichever you sign, have the contract reviewed by a solicitor or building consultant before you commit. The contract should clearly set out the fixed price, the progress-payment schedule, the build timeline, how variations are priced and approved, and any delay provisions. It should also spell out what’s excluded, because items like landscaping, driveways, and fencing are often left out of the contract price. Reviewing the legal terms is their lane, not ours, but we’ll check that the payment schedule lines up with how your lender releases funds.
Builds run over more often than people expect, usually through variations: a change to the plans, an upgrade, or an unforeseen site cost like rock in the ground, a difficult soil classification, a sloping block, or a retaining wall the site turns out to need.
Keep a contingency buffer of 5 to 10% of the build cost, separate from your deposit, to absorb these. It’s the difference between a manageable surprise and a stalled build.
If a variation pushes the cost beyond your approved loan, tell your lender early and supply updated quotes. You may be able to access additional funding, but it isn’t automatic, and the lender has to reassess, sometimes with a fresh valuation. If extra funding isn’t approved, you cover the difference yourself, or the build stops until the money is found.
Delays carry their own cost. The longer the build runs, the longer you’re in the interest-only phase, and the more interest you pay before the loan converts. This is exactly the kind of thing we pressure-test up front, so you’re not discovering a shortfall halfway through the frame stage.
When the final stage is paid and the build is complete, the loan converts to a standard principal-and-interest home loan. Interest-only ends, and you start paying down the balance over the contracted term, typically 25 to 30 years.
From there it behaves like any other home loan. You can usually choose your repayment frequency, keep or add an offset account, fix part of the balance, or look at refinancing down the track if a better option appears. There’s no second application for the conversion; it’s built into the original construction loan.
One nuance to check: at some lenders the interest-only build phase counts toward a maximum interest-only period, commonly up to five years in total. If you were hoping to stay interest-only after the build, it’s worth knowing how much of that window the construction phase uses up.
To qualify for a construction loan, you’ll generally need a licensed builder, a fixed-price contract, and a minimum deposit. As a rule of thumb, deposits start at around 5%, though 10 to 20% is more common, and a larger deposit widens your lender options. If your deposit is below 20% of the on-completion value, expect Lenders Mortgage Insurance to apply. Most lenders also limit construction loans to homes you’ll live in or hold as a long-term investment, not speculative builds for quick resale.
Serviceability is assessed the same way as any home loan, with one industry-wide rule worth knowing: lenders test your repayments at 3 percentage points above the actual rate, a buffer set by APRA . It’s there to check you could still manage if rates rose. A borrowing power calculator gives you a rough starting figure before you talk to anyone.
On timelines, lenders typically want the first drawdown within 6 to 12 months of approval and the build finished within about 24 months, both subject to lender policy. They may pause further payments if an inspection shows the build is significantly off track.
Two points worth being clear on. The lender’s stage valuations confirm that the work claimed has been done, so the right progress payment is released; they are not a check on building quality or workmanship, so arrange your own independent building inspections if you want that assurance. And before the final payment, you’ll usually need your own home insurance in place, taking over from the builder’s site insurance.
A construction loan suits a new build, a house-and-land package, a knock-down rebuild, or a major structural renovation. It works best if you’re comfortable with a staged process and can absorb some cost uncertainty along the way. It’s a harder fit if you need the cost locked to the dollar, can’t hold a separate contingency, or are working to a fixed, immovable deadline.
A few situations bring their own considerations:
A construction loan has more moving parts than a standard home loan, and a few of them, the contract, the contingency, the serviceability, are easier to get right before you commit than after.
Blutin Finance is an independent broker based in Bundoora, serving Melbourne’s northern suburbs, with access to 45+ lenders across the Big Four, mid-tier lenders, and non-bank specialists. Not every lender treats construction the same way, so comparing them matters more here than on a standard purchase.
Before any application goes to a lender, we do a thorough Honest Assessment. We check your deposit, your contingency buffer, and whether the numbers service, against the construction policies of the lenders that actually fit your build. If it doesn’t stack up, we’ll tell you. Sometimes the Quick No is the best answer, and it’s better to hear it now than three stages into a build. That discipline is why over 95% of the applications we submit get approved.
Most lenders look for at least 5%, but 10 to 20% is more common, and a larger deposit widens your options. If your deposit is below 20% of the property’s on-completion value, you’ll usually pay Lenders Mortgage Insurance. The exact figure depends on the lender and the on-completion valuation, which is why we check it against specific lender policies before you commit.
You pay interest only, and only on the funds drawn so far, not the full loan amount. Interest is calculated daily on the drawn balance and charged monthly, so your repayment rises each time a new stage is funded. Once the build is complete, the loan converts to principal and interest and you start paying down the balance.
It converts to a standard principal-and-interest home loan over the contracted term, typically 25 to 30 years. Interest-only ends, and the loan behaves like any other home loan from there: you can choose your repayment frequency, use an offset, fix part of the balance, or refinance later. There’s no new application for the conversion; it’s built into the original loan.
It’s difficult while the build is in progress, because most lenders want a completed home with a final valuation before they’ll refinance. The practical path is to wait until construction finishes and the loan converts to a standard home loan, then refinance from there if a better option exists. If you’re concerned about your rate during the build, raise it early so we can map out the timing.
First, tell your lender early. If a variation or overrun pushes the cost beyond your approved loan, you may be able to access additional funding, but it isn’t automatic and the lender has to reassess. If it isn’t approved, you cover the difference yourself, or the build stalls until the funds are found. This is why we recommend a 5 to 10% contingency buffer, separate from your deposit, before the build starts.
In most cases, yes. Lenders strongly prefer a fixed-price contract because it sets the total build cost up front, and many won’t fund a build without one. The alternative, a cost-plus contract, is open-ended on cost and much harder to finance. Whichever you use, have it reviewed by a solicitor or building consultant before signing.
Book a 30-minute first meeting. We’ll compare construction lenders for your build, check the progress-payment schedule against your contract, and model what the interest actually costs through the build phase. No obligation, no fee, and no paperwork before the call.
Call 1300 188 808 or book a time online Our office is at Level 2, 1/3 Janefield Drive, Bundoora VIC 3083, open Monday to Friday, 8:30 AM to 6:00 PM.