A construction loan works differently from a regular home loan. Funds are released in stages as your build progresses — here's exactly how it works.
- Construction loans draw down in five progress stages — you only pay interest on what's drawn.
- Lenders need a fixed-price building contract, plans and council approval before final sign-off.
- Repayments are interest-only during the build, converting to principal-and-interest at completion.
- Always hold a contingency of 10-15% above contract price for variations and overruns.
Building a home rather than buying an established one comes with unique financing requirements. A construction loan releases funds in stages rather than all at once — so you only pay interest on the money that's actually been drawn down.
The Five Stages of a Construction Draw
Stage 1: Slab / Base (typically 10%) — After the foundation is poured and slab laid. Lender sends a valuer to confirm before releasing funds.
Stage 2: Frame (typically 15-20%) — Frame and roof trusses erected. Progress inspection triggers next drawdown.
Stage 3: Lock-Up (typically 35%) — Walls, roof, windows, external doors in place. The largest single drawdown.
Stage 4: Fixing / Fit-Out (typically 25%) — Plastering, electrical, plumbing, kitchen, bathroom fixtures, flooring.
Stage 5: Completion (typically 10-15%) — Final painting, fixtures, appliances, site clean.
Before Your Construction Loan Is Approved
You'll need: a fixed-price building contract, council-approved plans and permits, builder's licence and insurance documentation, and specification documents. The lender also orders an "as-if-complete" valuation — a professional assessment of the expected value once built.
Managing Repayments During the Build
During construction, repayments are interest-only on amounts drawn. Once construction is complete, your loan converts to a standard principal and interest home loan.
House and Land Package Finance
If you're purchasing a house and land package rather than building on land you already own, some lenders bundle the land purchase and construction into a single loan facility. The land purchase settles first, then the construction drawdowns follow. See our dedicated house and land package finance service for how this works.
First Home Buyer Construction Loans
If you're a first home buyer building your home, you may be eligible for the First Home Owner Grant (FHOG) in NSW — currently $10,000 for new homes, paid at commencement of construction. You may also qualify for the First Home Guarantee with just a 5% deposit.
What Happens If Costs Go Over Budget?
Budget a 10-15% contingency on top of your contract price. If costs exceed your approved loan amount, you may need to fund the difference from savings, request a loan top-up (subject to approval), or negotiate with your builder on finishes.
Our construction loan brokers compare lenders, structure the right facility for your timeline, and manage the approval process end to end. Contact Sam to discuss your build.
Frequently Asked Questions
How long does a construction loan approval take?
Typically 3-4 weeks from submission of a complete application. The as-if-complete valuation is often the longest part of the process.
What if my builder goes insolvent during construction?
Most builders are required to hold domestic building insurance (home warranty insurance) which provides some protection. Your broker and solicitor can advise on implications.