Home/Residential/Construction loans
Construction loans
Know what you can borrow before the slab goes down.
House and land, a knockdown rebuild, a granny flat, or a major renovation. The loan pays your builder in stages — and almost everything that goes wrong is visible before the first stage is drawn.
Construction loans
The lender is valuing a house that doesn't exist yet.
You have plans, a quote from a builder, and possibly the land. It is the largest thing most people will ever commission, and the finance behind it works almost nothing like the mortgage on a house that is already standing. The same is true, on a smaller scale, of a granny flat. The money doesn't arrive once. It arrives in pieces, each one released after somebody has been out to look at the work.
I have spent twenty-one years in lending, with more than twenty-five lenders on one panel, and I run a construction file from the first conversation through to the final draw. This is where a broker earns their keep — the loan effectively settles five or six times, and each one of those needs chasing by someone who knows the builder is waiting.
The part nobody explains is the valuation. The lender has a valuer assess your finished house from the plans and specification — as if complete — and lends against that figure rather than against what you are paying for it. If it comes back below the land plus the build, the difference is cash, from you, before a shovel goes in the ground. Knowing the final figure is important, and finding it out early is most of the value in having me on it.
Start to finish
How it works
Five steps, and the first one matters more here than on any other loan I write.
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A conversation, before you sign the building contract
Thirty minutes, and nothing touches your credit file. What you're building, where, who with, and what you've been quoted. Coming to me before you sign is the single most useful thing you can do, because a contract already signed is a contract I have to work around rather than with.
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The real number, in writing
Land, build, and the costs that sit outside the building contract — which is where budgets usually come unstuck. Plus what you'll be carrying each month during the build, because for most people that means rent and loan interest at the same time.
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A shortlist, and the reasoning
Not every lender writes construction, and the ones that do differ in ways that matter once you've started: how many draws they allow, whether they charge for each one, how quickly they send a valuer out, and what they'll do about an owner-builder.
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Valuation as if complete, then lodgement
Your plans, specification and contract go to the valuer, who prices the finished house. I present the file so the valuer has everything they need the first time, because a short valuation discovered late is the most expensive thing that can happen on a build.
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The draws, and then a normal loan
Each time your builder completes a stage they issue a claim, the lender inspects, and the money is released. At practical completion the loan converts to principal and interest and gets reviewed each year like any other mortgage.
Where the money goes
How the loan actually pays out
Six moments, spread across roughly a year. You are only charged interest on what has been drawn, so the repayment climbs as the house goes up.
| Stage | What's finished | What to expect |
|---|---|---|
| Deposit | Contract signed, nothing built | In NSW a builder cannot ask for more than 10% as a deposit. It is usually paid from your own funds rather than drawn from the loan. |
| Base | Slab or footings down | For most builds this is the first money that comes out of the loan, and the first interest you'll be charged. |
| Frame | Frame erected and inspected | The house takes shape quickly here, which is also when people start wanting changes. See the variations note below. |
| Lock-up | Roof, external walls, windows and external doors in | Usually the largest single draw of the build, and the point at which your monthly interest takes its biggest step up. |
| Fixing | Internal fit-out — cabinetry, doors, skirting, tiling | Slower than it looks from outside. Most of the remaining spend happens here. |
| Practical completion | Finished and ready to hand over | Final inspection, final payment, and the loan switches over to principal and interest. |
Two things worth knowing before you sign. The percentage paid at each stage is set by your building contract, not by the lender — so it is worth reading that schedule closely, and worth having me check it fits what the lender will agree to release. And in NSW, a residential building contract over $20,000 carries a five-day cooling-off period.
Six ways this starts
The situations I see most often
| Situation | Who it suits | What I'd tell you |
|---|---|---|
| House and land package | A first or second home buyer on the city's edge | Usually two contracts, not one — land settles first and the build runs after. The two have separate timelines and the gap between them is where the holding costs live. |
| Knockdown rebuild | A family who likes the street more than the house | Common across Western Sydney and often the better value. The existing house is usually the security until it comes down, so the order of events needs setting up with the lender rather than around them. |
| A major renovation or extension | Owners adding a storey or opening up the back | If it's structural, it's a construction loan. If it's cosmetic, a top-up against your equity is usually faster and cheaper — and I'll tell you which one you've actually got. |
| Buying land now, building later | Someone who found the block before the plans | Perfectly workable, but a land loan and a construction loan are assessed separately, and some lenders set a window for when building has to start. Worth knowing that window before you buy the block. |
| A granny flat or second dwelling | Owners adding rental income, or room for family | Very common across Western Sydney, and often funded by releasing equity in the existing home rather than by a full construction loan — which is simpler and cheaper where the build is modest. The question worth asking early is whether the lender will count the expected rent toward what you can borrow. They differ on that, and it changes the answer. |
| Owner-builder | Someone project-managing their own build | A much shorter list of lenders will fund this, and they generally lend a smaller proportion of the value. |
Buying a commercial building rather than a home? That's on the commercial property finance page.
Straight about it
What it costs you
A construction loan on a home you'll live in is a residential loan. The lender pays me and you pay me nothing, and that commission is disclosed to you in writing before you sign.
The build has costs the contract doesn't mention
This is the section to read twice. Most construction budgets come unstuck not on the build price but on everything sitting beside it.
- Interest during the buildYou pay interest on what has been drawn, and it climbs stage by stage. Over a year that is a real number, and it should be budgeted rather than discovered.
- Rent, at the same timeUnless you're staying put through the build, you are paying somewhere to live as well. For most people this is the largest hidden cost of building.
- Progress draw feesSome lenders charge for each release and each inspection. Six draws makes that worth comparing between lenders rather than ignoring.
- Out-of-contract itemsDriveway, landscaping, fencing, letterbox, clothesline, blinds, air conditioning. Routinely excluded from the build price, routinely forgotten, and they arrive all at once at the end.
- Council and approvalsDA or complying development certificate, plus the usual authority fees.
- Valuations and inspectionsThe “as if complete” valuation up front, and an inspection at each stage.
- Transfer duty on the landPayable on the land component. First home buyers should ask about the current concessions before assuming they apply.
Later, not now
What to have ready
Nothing for the first conversation. This is what a lender will want before it will approve a build.
- The building contractFixed price, signed by both parties. Cost-plus arrangements are far harder to finance and some lenders won't touch them.
- Plans and specificationsThe full set, including the schedule of finishes. The valuer prices what's on the page, so what's on the page matters.
- Your builder's paperworkLicence details and their insurance certificate.
- Council approvalThe DA or the complying development certificate.
- The landContract of sale, or the title if you already own it.
- YouPayslips, or — if your income comes from an ABN — your returns and notices of assessment, along with ID and a list of your existing debts and card limits.
One thing worth saying about this list: the contract, the plans and the valuation all have to agree with each other. Changing the plans after the valuation is done means doing it again.
No dead ends
Where it gets hard, and what I do about it
Building is the longest, most stressful borrowing most people ever do. Almost all of it is manageable if it's seen coming.
Tell me where you're stuck-
The valuation comes back under land plus build
The most expensive thing that happens on a construction file. The valuer prices the finished house from the plans, the lender lends against that, and if the figure is lower than what you are spending, you have to find the difference in cash — usually at the worst possible moment, with a contract already signed.
What I do about itWe establish this early rather than late. If a figure looks marginal, a different lender uses a different valuer and can take a different view of the same plans, and that is worth exploring before anything is committed rather than after.
It is also the reason I would rather see your contract before you sign it than after.
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Variations aren't funded, and you will want variations
Around frame stage the house becomes real and people start changing things — a better kitchen, an extra window, the bathroom moved. Every one of those is a variation to the building contract, and the lender approved a loan against the original plans. Variations generally come out of your pocket, in cash, during the build.
What I do about itI'll tell you this before you start rather than when the first invoice arrives, and we build a contingency into the plan so the budget can absorb a change or two without drama. Where a variation is large enough to be worth re-approving, I'll tell you that too — and what it would cost in time.
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Rent and loan repayments, at the same time
For most of a year you are paying somewhere to live and paying interest on a house you cannot move into. The interest grows at every draw. It is the part of building that people underestimate most consistently, and it is the reason some builds become stressful well before anything goes wrong on site.
What I do about itWe model it month by month before you commit — what the interest looks like at base, at frame, at lock-up — so the number is something you have already planned for rather than something that creeps up on you.
Where it looks tight, there are usually structural answers: a different draw schedule, a longer settlement on the land, or simply building a buffer into the borrowing from the start.
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Your builder wants paying before the lender has inspected
Builders invoice on completing a stage and expect payment quickly. Lenders release money after an inspection, which takes as long as it takes. That gap is friction on every build, and when it drags, work stops and your relationship with the builder suffers.
What I do about itThis is unglamorous and it is most of the job. I get each claim in the moment it is issued rather than the week after, chase the inspection, and keep the builder told where it is up to. The lenders I use for construction are chosen partly on how quickly they actually turn a draw around, which is not something you can tell from a rate table.
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Your builder goes under mid-build
It happens, and it has happened a good deal more in recent years than anyone would like. A half-built house with a collapsed builder is a genuinely difficult position — financially, legally and practically.
What I do about itI am not your lawyer and I won't pretend to be. What I can do is make sure the builder's insurance and licence details were checked and on file before we drew a dollar, keep the draws matched to work actually completed so you're never far ahead of the build, and work with the lender on what the loan can do while you sort the rest out.
The best protection is the boring one: not paying for work that hasn't been done.
Bring me the contract before you sign it.
One call, no credit enquiry, no obligation. Half an hour now is worth more on a build than on any other loan I write.
Asked on the phone
Questions people are too polite to ask
If yours isn't here, call and ask it. Ten minutes on the phone beats a year of wondering.
Ask Alen directlyHow is this different from a normal home loan?
A normal mortgage hands over the whole amount at settlement, against a house that already exists. A construction loan releases money in stages as the build progresses, against a valuation of a house that doesn't exist yet, with an inspection before each release.
You also pay interest only on what has been drawn, so the repayment starts small and grows as the house does. At completion it becomes an ordinary principal and interest loan.
Do I make full repayments from day one?
No. During the build you are charged interest only, and only on the portion that has actually been released. After the slab goes down you might be paying interest on a fraction of the total; by lock-up it is most of it.
Once the house is finished, the loan converts to principal and interest and the repayment steps up to its full level. That step is worth seeing in writing before you start.
What if the build costs more than the contract says?
A fixed-price contract protects you from a good deal of this, which is why lenders prefer them and why I'd rather you had one. What it does not cover is changes you ask for — those are variations, and they are generally paid in cash during the build rather than added to the loan.
Plan a contingency. A build that has no room in it for a single change is a build that will be stressful.
Will I be paying rent as well?
Usually, yes, unless you can stay in the existing house or with family through the build. You will be paying rent and loan interest at the same time for most of a year, and the interest portion grows at every draw.
It's the most underestimated cost of building, so we work it out properly at the start rather than letting it arrive in instalments.
What if my approval expires before the build starts?
Approvals don't last forever, and builds get delayed — council, builder availability, weather. If an approval lapses the lender reassesses, and that means your income, your debts and the valuation all get looked at again as they are then, not as they were.
It is manageable when it's expected. Tell me as soon as a delay looks likely rather than when the letter arrives.
Can I get a construction loan as an owner-builder?
It is harder. Far fewer lenders will fund an owner-builder, and those that do generally lend a smaller proportion of the value and want more evidence of how the project will be managed.
Not impossible, but worth establishing what's available before you commit to doing it yourself rather than after.
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A year of building starts with one conversation.
Twenty-one years in lending, and one person on the file from the first valuation to the last draw.