Construction loans that keep the build moving

What is a construction loan?

A construction loan is designed for a house that does not exist yet, or one that is being substantially rebuilt. Instead of handing over a lump sum, the lender pays the builder in instalments tied to the stages of the build. MoneySmart’s glossary describes it in that spirit, and the practical effect is that you only pay interest on money that has actually been released.

It is a different animal to a standard purchase loan. The security is evolving, the risk is higher for the lender, and the paperwork reflects that. Done well, it gives you control and cost-efficiency. Done poorly, it can stall midway.

How do progress payments work?

The loan limit is set at the start, based on the contract and the land. As each stage finishes, your builder issues a claim, the lender checks it (often through a valuer or inspection) and pays the builder. Typical stages are slab, frame, lock-up, fixing and completion.

Stage	What is usually finished	What the lender wants
Deposit or site start	Contract signed, approvals in place	Signed contract, permits
Base or slab	Foundations laid	Builder claim, possible inspection
Frame	Structure up	Claim, certificates as needed
Lock-up	Roof, windows, external walls	Claim, inspection
Fixing	Internal fit-out	Claim
Completion	Final works and certification	Final claim, occupancy certificate

Our guide on construction loan progress payments gives more detail on timing and what slows payments down.

What do lenders look at for a construction loan?

Beyond your income and credit, lenders examine the build itself.

• The builder. Licence, insurance and track record. Many lenders prefer registered builders on fixed-price contracts.
• The contract and plans. Fixed price versus cost-plus, inclusions, schedule and council approvals.
• The budget. Whether the total cost, including fees and contingency, is realistic.
• The land. Whether you own it, are buying it, and any encumbrances. If you are doing both, see land and construction loans.
• Your capacity. Income to service the loan, plus any rent or accommodation costs while you wait.

Lenders also check that you can meet costs outside the loan, such as landscaping, driveways, window coverings or connection fees, which are often not included in the base contract.

Who does this suit?

• People building on land they already own.
• Buyers purchasing land and a house-and-land package.
• Owners knocking down and rebuilding.
• Families adding a significant extension or granny flat; see renovation loans.
• Owner-builders with the experience to manage a build.
• Self-employed borrowers whose income needs careful presentation; see self-employed home loans.

What goes wrong with construction loans?

A few predictable things.

• Cost blow-outs. Extras and variations eat the budget.
• Delays. Weather, supply and approvals push the schedule, extending interest and rent.
• Valuation gaps. The finished value may not match the cost.
• Builder problems. A builder in difficulty can stall everything.
• Documentation hiccups. Missing certificates or wrong invoices hold up progress payments.

None of these is a reason to avoid building. They are reasons to plan with contingency and with a broker who has watched builds go sideways before.

How does Ownright approach construction finance?

Trevor Scott has spent over four decades in finance, long enough to see what happens when a build goes off the rails. Our approach starts with a sanity check of the numbers, because the best way to protect a project is to make sure it is properly funded. We then choose a lender whose construction policy matches the job, including owner-builders, unusual designs and borrowers with non-standard income or credit.

When the project is a fraught one, for example a half-finished build, a builder who has failed or a lender who has pulled out, we look for alternatives, including short-term and private solutions that can get things moving again. Ownright works Australia-wide from Knoxfield, Victoria, so your block can be in any state or territory. Where the plan involves releasing existing equity to build, our home equity loans page is a useful companion.

Illustrative example

This is a hypothetical case for explanation. A family owns a block outright and wants to build. They are self-employed, with a mix of company and personal income. A first lender worries about the income presentation, and a second wants a larger contingency.

A broker could package the income evidence clearly, build contingency into the budget, and select a lender with construction expertise who is comfortable with the structure. The land equity counts toward the deposit, and the build proceeds in stages.

Mistakes to avoid

• Signing a building contract before checking finance.
• Setting the budget with no contingency.
• Forgetting costs outside the contract, such as landscaping and fencing.
• Using a builder whose financial health you have not checked.
• Missing the paperwork required for each progress claim.

Documents to have ready

• The building contract, plans and specifications.
• Council or private certifier approvals.
• The builder’s licence and insurance details.
• Evidence of income, deposit and land ownership.
• A cost breakdown including items outside the contract.

What is the difference between fixed-price and cost-plus contracts?

The type of building contract affects how comfortable a lender feels.

Contract type	How cost works	How lenders often view it
Fixed price	Agreed total, subject to listed variations	Generally preferred, as costs are predictable
Cost-plus	Actual costs plus a builder margin	More scrutiny, since the final cost is open-ended
Owner-builder	You manage trades and materials	Narrowest lender choice, closest checks

Fixed price contracts can still change through variations, provisional sums and prime cost items. Read these allowances carefully, because they are where budgets drift. Your broker and conveyancer can help identify risks before you sign.

How does the move from construction to a normal loan happen?

When the build is complete and the final stage paid, the construction facility typically converts to a standard home loan. The lender may require a completion certificate, a final inspection and evidence of insurance. At that point, you can often look at changing the structure, for example to add an offset or choose a different repayment type, or even refinance to another lender if the terms no longer suit. Planning this step is easy to forget when the build is only starting, but it is one of the points where a broker adds ongoing value.

Which borrowers find construction finance hardest?

Some situations draw more questions from lenders.

• First-time builders with no experience of contracts. Lenders want reassurance that someone is managing the project.
• Self-employed borrowers with short trading histories. The loan runs for a long period and lenders want to be confident of income throughout.
• Borrowers with credit blemishes. Specialist lenders may help, but costs and conditions change.
• Builds on unusual land. Sloping blocks, rural sites, bushfire zones and flood-prone areas all add complexity.
• Projects already underway. A stalled build or a builder who has failed needs a rescue plan, which is a different task to starting fresh.

For these, a mainstream “computer says no” is common. A broker who knows how to present the project, and where to take it, can change the answer.

Planning a build?

Start your application and share the plans. We will assess finance early so the project does not hit a wall midway. You can also tell us about your build or phone 03 7043 7233.