Building a New Home?

Construction loans work differently from standard home loans because the lender generally releases funds progressively as the build reaches agreed stages. That means the finance needs to line up with the building contract, valuation, borrower contribution and progress-payment process.

This guide explains the lending process in practical terms. Exact requirements and timing vary by lender, builder, contract and project.

What is a construction loan?

A construction loan is designed to fund a new build or, in some cases, a substantial renovation. Instead of releasing the full loan in one amount, the lender generally makes progress payments as construction milestones are completed.

Read Construction Loans for an overview of the loan type and the factors lenders commonly consider.

How do construction loan progress payments work?

The builder issues invoices as agreed stages are completed. The borrower or broker submits the required information to the lender, and the lender may arrange inspections or request other evidence before releasing funds.

The exact stages and percentages come from the building contract and lender requirements rather than one universal schedule.

Common building stages can include

• Base or slab
• Frame
• Lock-up
• Fixing or fit-out
• Practical completion

Do you pay interest on the full construction loan from day one?

Generally, interest is charged on the amount drawn rather than the full approved facility during construction, subject to the loan terms. The repayment arrangement can differ between lenders, so confirm how interest and repayments will work before construction begins.

What documents are commonly needed?

Construction applications can require more project documentation than a standard purchase. Depending on the lender and project, this may include:

• Signed building contract
• Plans and specifications
• Builder details
• Relevant approvals and insurance information
• Land or property information
• Income, expense, debt and identification documents

How does the lender value a construction project?

The lender may assess the proposed completed property using the plans, specifications, contract and expected end value. The valuation can affect the approved loan amount, loan-to-value ratio and the contribution required from the borrower.

If the valuation is lower than expected, additional funds or changes to the finance or project may be required.

Should you get finance organised before signing the build contract?

It is sensible to understand the likely borrowing position and lender requirements before making commitments you cannot easily unwind. A building contract can create significant obligations, so legal and finance advice should be obtained before signing where appropriate.

You can use the borrowing capacity calculator as an initial estimate and then confirm the position with a lender or broker.

What happens if the build costs more than expected?

Variations, site works, delays, finishing costs and other changes can increase the total project cost. Whether the lender will fund an increase depends on valuation, serviceability and credit criteria. Additional costs may need to be met from the borrower's own funds.

Rather than relying on a fixed universal contingency percentage, build a realistic project buffer based on the contract, site and circumstances.

Are fixed-price contracts easier to finance?

Lenders commonly prefer clear, detailed building contracts that provide certainty about the scope and cost of works. The acceptable contract type and builder requirements vary between lenders, so check lender policy before assuming a particular structure will be accepted.

How long does construction loan approval take?

There is no dependable universal timeframe. Construction applications can take longer than simple purchase applications because the lender may need to assess the borrower, builder, contract, plans and valuation. Current turnaround should be checked with the lender when the application is being prepared.

What happens at practical completion?

The lender may have final requirements before releasing the last progress payment. Once construction is complete and the lender's conditions are satisfied, the facility generally moves into its ongoing home-loan repayment structure according to the loan terms.

Your builder, certifier and local regulatory requirements operate separately from the lender's credit process, so keep each party's responsibilities clear.

Can the construction loan process be managed online?

Much of the lending paperwork and document exchange can be handled digitally. See Apply for a Home Loan Online for how the digital application process works.

How do you reduce avoidable construction-finance delays?

• Confirm lender requirements before the contract is finalised
• Keep plans, approvals and builder documents organised
• Understand who submits progress-payment requests
• Allow for project variations and timing changes
• Respond promptly to lender requests
• Keep communication open between the borrower, builder, broker and lender

If you are planning a build, explore construction loan options and check your initial range with the borrowing capacity calculator.