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Building My Home

How do construction loans work?

construction loan advice

Sometimes, the only way to live in your dream house is to create it yourself. Building your own home can be such a satisfying experience, but if approached from the wrong angle, you’ll be left digging deeper into your pockets than you can afford.

If you don’t have enough savings to fund construction comfortably, you may need a construction loan. Not to mention that building a home is a complicated process involving numerous parties, such as contractors, solicitors, lenders, accountants and the council.

Fortunately, our mortgage advisors will make your building experience as smooth as possible, managing all of the financial paperwork so that you can concentrate on the construction. Our team works closely with a variety of lenders, offering expert advice on which loan is most suited to making your vision a reality.


If you need financial assistance to build a new house or make some structural alterations to your existing home, this is the loan for you.

It is generally written as a land and construction loan, simultaneously covering the cost of purchase and/or build. By combining the land and construction costs into a single loan, the lender avoids the risk of the loan amount exceeding the value of the completed build.

To apply for your construction loan, you’ll need to provide your lender with the following documents:

  • A signed fixed price building contract, outlining construction specifications and costs
  • Council-approved construction plans
  • A copy of your builder’s licence and insurance policy
  • Quotes for any extra work that is not covered by the building contract, such as landscaping and electrical fittings

Your lender will review the land’s post-construction value, as well as your construction plans and costs, to determine the total loan amount. Upon loan approval, your lender will issue an offer for you to sign and return.

If you’re eligible for a construction loan, we’ll take the wheel and guide you through the entire process from start to finish.

Rather than your lender providing you with the full loan amount from the get-go, construction loans generally advance in stages known as progress payments. While the number of stages varies, there tend to be five or six.

Your financial contribution will be required at the land settlement stage. Your lender will then supply the remaining balance of expenses, all the way through to construction completion.

Construction loan stages

Land Settlement If you are buying or refinancing land, soil testing and clearing may be carried out before construction begins.
1 Base or Slab Stage At this stage, the foundation of your property is laid. This may involve land-levelling and the construction of retaining walls.
2 Frame Stage Your property’s frame is built. This phase covers brickwork, roofing and trusses, creating the shell of your new home.
3 Lockup Stage Your home is really beginning to take shape, with windows and doors being fitted. The building will become weatherproof and can be locked securely.
4 Fitout or Fixing Internal fixtures for your kitchen, bathroom and laundry are installed. Painting and tiling also begins.
5 Practical Completion The finishing touches are put in place to make your house a home, such as electricity and landscaping. A council representative inspects your home to check that it complies with building codes.

To make progress payments to your builder, you’ll have to submit a formal request to your lender, which includes:

  • Requesting an invoice from your builder
  • Contacting your lender to receive a drawdown request form
  • Completing and sending the form back to your lender, along with the invoice

As your lender provides funds in instalments, your repayments will usually be interest only during construction.

For example, if you receive a $400,000 construction loan but have only drawn $50,000 so far, you will only need to pay interest on that $50,000.

That’s right, you might actually end up saving money in interest payments during construction.

If you make any construction amendments that change the contract price even slightly, the lender may have to reassess your loan from square one – This can delay your construction quite a bit.

Avoid these extra costs and setbacks by making sure that you submit a final, complete building contract to your lender. Additionally, try to pay for any small post-approval variations with your own money if you can.

First things first, give yourself a pat on the back – You’ve officially built your very own home.

All that’s left to complete your home building experience are a few straightforward formalities.

Your lender will arrange a final inspection of the property to make sure it meets building code standards before sending the last progress payment to your builder. After this has been paid, your loan will convert to a previously approved mortgage.

Lastly, you will need to submit the following documents to your lender for complete sign-off:

  • A certificate of occupancy, showing that the building is safe to inhabit
  • Your builder’s final invoice
  • Your home building insurance policy

And that’s it, you can finally move into your dream home. Time to crack open the champagne!