Home loans · Building a new home
Construction loans, paid out one stage at a time.
Building is the only way of buying a home where you commit to the whole amount before anything exists. The loan is released in pieces as the house goes up, you pay interest only on what has been drawn, and the document governing most of it is your building contract — not the loan. Here's how that works, and where builds most often come unstuck.
Start here
The money doesn't arrive in one go.
With an established home, the lender pays the seller once and the loan begins. A construction loan works nothing like that. The lender approves the full amount, then releases it in instalments — progressive drawdowns — as each stage of the build is completed and signed off.
- You pay interest only on what has been drawn. If nothing but the slab has been paid for, that is what you are paying interest on. Your repayment starts small and climbs with each drawdown.
- Repayments are usually interest-only while you build. You are not paying down principal during construction, which keeps holding costs manageable while you are also paying to live somewhere else.
- It converts when the house is finished. The facility generally turns into an ordinary home loan on the terms already agreed — principal and interest over the remaining term — with no second application and no second settlement. The repayment steps up at that point.
| Stage | What has to be finished | Worth knowing |
|---|---|---|
| Deposit | Contract signed and the job in the builder's schedule. | Typically the smallest payment, and often the one you fund from savings before the lender releases anything. |
| Base or slab | Site cut, footings, underground plumbing, slab poured. | Where the surprises live. Rock, reactive soil, fall across the block and service connections cause most site-cost blowouts. |
| Frame | Frame and roof trusses up, braced and inspected. | The first stage where it looks like a house. The frame inspection has to pass before the draw is released. |
| Lock-up | External walls, roof, windows and external doors in — the building can be locked. | One of the larger draws, and usually where the balance owing starts to feel real. |
| Fixing or fit-out | Internal linings, cabinetry, doors, skirting, tiling, fixtures. | Where variations pile up, because it is late enough that changing your mind is expensive. |
| Practical completion | Finished, cleaned and ready to hand over, subject to a defects list. | Walk the house and list the defects before the final payment moves, not after. |
Every drawdown follows the same rhythm. The builder invoices for the completed stage, you authorise it, the lender arranges an inspection or progress valuation to confirm the work is genuinely done, and the funds go to the builder — not to you. That is deliberate, and it protects you as much as it protects the lender.
A valuer cannot walk through a house that doesn't exist, so they value it as if complete — working from the plans, the specification, the schedule of finishes and the contract price, and asking what the finished home would be worth on that block. The lender then works from the cost of land plus build, or that on-completion figure, whichever is the more conservative. If the valuation lands below what you are spending, the shortfall doesn't disappear; you cover it in cash. It is the most common reason a build that looked fine on paper needs more of your own money than expected.
The assessment
What a lender is actually weighing up.
You, in the ordinary way
Income and how stable it is, existing commitments, credit conduct, your deposit or the equity in the land — and whether you can carry the repayment once the loan is fully drawn and principal starts being repaid, not just the small early ones. Rent or another mortgage during the build sits in that assessment too.
The builder and the contract
A licensed builder, a contract covering the whole job, and the insurances required where you're building. Lenders look at whether the contract price and the plans match, and whether the house could realistically be completed for the money. A vague or partial contract is the fastest way to stall a file.
The finished house as security
The land, the plans, the council or certifier approvals and the on-completion valuation. The lender is taking security over something that isn't built yet, so it wants confidence in what will exist at the end — and in the block, since size, location and zoning all feed that valuation.
The document that matters
The contract is doing more work than the loan.
People spend weeks comparing lenders and an afternoon reading the building contract. It should be the other way round. The contract sets what gets built, for how much, in what order, and who wears it when something costs more than expected.
| Contract type | How it works | Where it helps | Where it bites |
|---|---|---|---|
| Fixed price | One agreed sum for the scope in the plans and specification. | Everyone knows the number, and lenders are far more comfortable because the amount needed to finish the house is defined rather than estimated. | "Fixed" applies only to that scope. Provisional sums, prime cost items and anything you change later sit outside it. |
| Cost plus | You pay the actual cost of labour and materials plus an agreed margin. | Real flexibility on a complex or custom job, with no builder's risk margin baked into the price. | There is no final figure to lend against, so funding one is considerably harder — and the budget risk sits with you, not the builder. |
| Owner-builder | You take the builder's role under an owner-builder permit and manage the trades. | Can remove the builder's margin if you genuinely have the skills, the time and the trade relationships. | No head contract, no builder's warranty behind the job, and progress much harder to verify. Treated far more cautiously. |
Provisional sums, prime cost items and variations
When a build goes over budget, this is nearly always why. It is rarely one dramatic event — it is a long series of small ones.
- Provisional sums are allowances for work that can't be priced accurately at signing: site costs, excavation, drainage, service connections. The contract carries an estimate; if the real cost is higher, you pay the difference.
- Prime cost items are allowances for things you haven't chosen yet — appliances, tapware, floor coverings, the front door. The allowance is often set at the cheapest option meeting the specification, and it is very easy to choose something nicer eleven times in one afternoon at the selections appointment.
- Variations are changes made after signing. Each is priced by your builder at the moment you have the least leverage, and each can add time as well as money.
None of this is a builder behaving badly; it is how the industry prices uncertainty. The problem is that a loan approved against a contract price does not automatically stretch to cover it, so overruns come out of your savings — at the same time you're covering rent and rising interest.
Set aside a genuine buffer above the contract price, keep it liquid, and treat it as untouchable until the house is finished. We're deliberately not printing a percentage, because the right buffer depends on your block and how many allowances your contract carries — a flat site with a fixed-price project home is a different risk to a sloping block with a long list of provisional sums. What we can tell you is that the buffer people regret is always the one that was too small, and that spending it on upgrades early is how it usually disappears before it's needed.
The cost people forget
You have to live somewhere while it's being built.
This one catches people, and it has nothing to do with the loan documents. Through the whole build you're paying rent, or a mortgage on the home you still own, and a growing interest-only repayment on the construction loan. Two housing costs at once, for as long as the build takes.
Because interest is charged only on the drawn balance, that second cost starts gently and grows with every stage. It is smallest when you're most relaxed about it and largest at the end, when your contingency may already be thin. Budget for the shape of it, not the average — and allow for the build running longer than the contract implies, because weather, trades, supply and inspections all move dates.
The numbers that sit outside the contract
- Land settlement first. If you're buying the block and building, the land generally settles before construction starts, and you carry it from then.
- What the contract excludes. Driveways, landscaping, fencing, letterboxes, clotheslines, blinds and sometimes floor coverings are commonly outside the build price. Read the exclusions list line by line.
- Approvals and connections. Council or certifier fees, inspections and utility connections are real money, and often yours rather than the builder's.
- The step up at the end. Test the principal-and-interest repayment against your income today, not against the pay rise you're hoping for.
Get ready
What to have together.
Construction files carry more paperwork than a standard home loan, and most delays we see come from a document that hasn't arrived rather than from the lender.
Building as an owner-builder? Expect the file to be examined far more closely. Without a head contract and a builder standing behind the job there is no fixed price to lend against and no simple way to verify progress, so these projects are treated very differently and are much harder to fund. Permits, insurance obligations and what you're allowed to do yourself are set by your state or territory — check those before you commit to the approach.
How it works with us
Three steps.
Tell us the project
The block, the builder, the contract price and what you've saved. A tender rather than a signed contract is even better — that's the point where advice is worth the most.
We match it to a lender
Construction lending isn't uniform across our panel. We check your build, your contract and your position against policy before anything is lodged, so your credit file isn't used to find out.
We stay on it through every draw
Approval and settlement are the start, not the end. We handle the drawdowns with you stage by stage, through to completion and the switch to a normal home loan.
Common questions
Construction finance, answered.
How is a construction loan different from a standard home loan?
Only in how the money is released. A standard home loan pays out once, at settlement. A construction loan is approved for the full amount but drawn in stages as the build progresses, with each stage confirmed as complete before the lender pays the builder directly. Repayments are usually interest-only during the build. Once the house is finished, the facility generally converts to an ordinary principal-and-interest home loan without a fresh application.
Do I pay interest on the full loan amount from the start?
No. Interest is charged only on what has actually been drawn, so your repayment starts small and grows with each drawdown, reaching its full level around the time the house is finished. It's a genuine advantage of the structure — but it means the cheapest months are the first ones, so plan your budget on the later figure rather than the first statement you receive.
Do I still have to pay rent or my existing mortgage while building?
Yes, and it's the cost most often underestimated. For the whole build you carry two housing costs: where you live now, plus a construction repayment that grows every stage. Lenders factor that into whether the loan is affordable, and you should factor it into your own planning with room for the build running longer than the contract implies. If the combination is uncomfortable on paper, it will be worse in practice.
What happens if the build costs more than the contract price?
Generally you fund the difference. A loan approved against a contract price doesn't automatically expand to cover overruns, and asking to increase the facility mid-build means a fresh assessment — including a fresh look at the valuation and at circumstances that may have changed. That's exactly why a cash contingency held outside the loan matters. Overruns usually come from provisional sums, prime cost allowances and variations rather than anything dramatic.
Is a fixed-price contract actually fixed?
It's fixed for the scope described in the contract, which isn't the same as fixed overall. Provisional sums, prime cost allowances and any variation you request afterwards all sit outside the fixed amount. It's still far more certain than the alternatives, and lenders much prefer it — just read the allowances and the exclusions list closely so you know what "fixed" is covering.
Can I get a construction loan as an owner-builder?
Owner-builder projects are treated very differently and are considerably harder to finance. Without a licensed builder and a head contract there's no fixed price to lend against, no builder's warranty behind the work, and no simple way for a lender to confirm a stage is complete. Where finance is available, expect much closer scrutiny and a substantially larger contribution from you. Permit and insurance requirements are set by your state or territory, so check those first, and have an honest conversation before committing to that path.
What if my builder goes into administration part-way through?
It happens, and the structure limits some of the damage: funds are released against completed stages, so you haven't paid for work that was never done. Beyond that you're relying on the domestic building or home warranty insurance that applies where you're building, and on the terms of your contract. One more reason to check the builder's licence and insurances before signing, and to keep every invoice, inspection and variation documented.
What happens to the loan when the house is finished?
At practical completion the final payment is released and the loan converts to a normal home loan on the terms already agreed, usually principal and interest for the remaining term. The repayment steps up, because you're now paying down principal on the full balance rather than interest on part of it. It's the moment to be sure that long-run repayment fits your budget, and a sensible time to review the structure with us — what suited a build may not suit you afterwards.
Let's talk
Send us the contract before you sign it.
No cost, no obligation, and no credit enquiry while we work it out. We'll read the contract, model what you'd be paying at each stage, and tell you plainly whether the build stacks up against your income and savings — including if the answer is to wait, or to build something smaller.
Prefer to talk it through?
Use the call back form at the top of this page and a broker will come back to you. If you already have the contract, the plans and your savings figures together, you can start a full application instead.
The Finance Team is the trading name of Online Showroom Pty Ltd, a credit broker rather than a lender, holding Australian Credit Licence 551493. Everything here is general information about how construction lending commonly works, and any figures discussed with us are estimates only — not a quote, and not an offer of credit. Every application is subject to assessment by the lender, and building contracts, approvals and insurance requirements differ between states and territories.