Construction Loans Australia: The Complete Guide

A construction loan is a specialist home loan designed for people building a new home or undertaking a major renovation. Unlike a standard home loan where the full amount is drawn at settlement, a construction loan releases funds in stages as your build progresses. Understanding how this works — and what can go wrong — is essential before you sign a building contract.

How construction loan drawdowns work

Construction loans release funds in 5–6 progress payments tied to build milestones. Each drawdown is triggered when your builder reaches a stage and submits an invoice. You only pay interest on the funds drawn — not the full loan amount — which keeps costs lower during the build phase.

• Stage 1 — Deposit/Slab: Typically 5–10% of the build contract. Paid when the slab is poured.
• Stage 2 — Frame: 15–20% of the build contract. Paid when the frame is erected and inspected.
• Stage 3 — Lock-up: 20–25%. Paid when the roof, windows, and external doors are installed.
• Stage 4 — Fit-out/Fixing: 20–25%. Paid when internal fit-out (plumbing, electrical, plastering) is complete.
• Stage 5 — Completion: 10–15%. Paid when the Certificate of Occupancy is issued and you take possession.

What lenders assess for construction loans

• Fixed price building contract — lenders require a signed, fixed-price contract from a licensed builder
• Council-approved plans and specifications — full DA or CDC approval required before drawdown
• "On completion" valuation — lender values the finished property, not the land + build cost
• Builder's insurance — public liability and home warranty insurance required
• Your income and serviceability — assessed on the full loan amount, not just the drawn amount
• LVR on completion — most lenders require 80% LVR or below on the finished value

The valuation risk — the most common pitfall

The lender's valuer assesses the "on completion" value of your home — what it will be worth when finished. If this valuation comes in below your combined land + build cost, your LVR increases and the lender may reduce the approved loan amount. This is called a valuation shortfall and it's more common than most buyers expect, particularly in new estates where comparable sales are limited.

Construction loan vs standard home loan: key differences

• Drawdown structure: Construction loans release funds in stages; standard loans release in full at settlement
• Interest during build: Construction loans charge interest-only on drawn funds; standard loans charge on the full amount from day one
• Rate: Construction loan rates are typically 0.1–0.3% higher than equivalent standard home loan rates
• Valuation: Construction loans are valued on "on completion" basis; standard loans on current market value
• Conversion: Construction loans convert to standard home loans at completion — this is when you should review your rate