Construction Loans Explained
Building a home is one of the most rewarding — and most complex — property journeys you can take. A construction loan works quite differently from a standard home loan, and understanding how it’s structured will save you a lot of stress once the build is underway.
What Makes a Construction Loan Different
With a standard home loan, you borrow the full amount upfront and start paying interest on the whole balance from day one. A construction loan is released in progress payments (also called drawdowns), matched to specific stages of the build, and you generally only pay interest on the amount that’s actually been drawn down so far — not the full approved loan amount.
This keeps your repayments lower during the build, since your builder is being paid in instalments as work is completed, not all at once.
The Typical Stages of a Build
While every builder’s contract is slightly different, most construction loans release funds against five general stages:
Slab/Base — site preparation and the foundation or slab is poured
Frame — the frame, roof trusses and (often) the roof covering are completed
Lock-up — external walls, windows, and doors are installed, and the home is weatherproof
Fixing — internal fittings such as cabinetry, doors, tiling and appliances go in
Completion — final fittings, cleaning, and the home passes final inspection
At each stage, your lender typically requires an inspection (often by an independent valuer or the lender’s own assessor) to confirm the work has been completed to the value being claimed, before releasing that portion of funds to your builder.
What You’ll Need to Apply
Construction loan applications generally require more documentation than a standard purchase, including:
A fixed-price building contract with a licensed builder
Council-approved plans and specifications
A progress payment schedule showing the value allocated to each stage
Builder’s insurance and, in most states, home warranty insurance
Land contract or title details (if you already own the land, or are purchasing it as part of the deal)
Understanding “Interest-Only During Construction”
Most construction loans default to interest-only repayments during the build, switching to standard principal and interest repayments once the home is complete (or once the final drawdown occurs). It’s worth budgeting for the fact that your repayments will step up once the full loan balance is drawn — this shouldn’t come as a surprise on move-in day.
Land + Construction: One Loan or Two?
If you’re buying land and building on it, most lenders will structure this as a single loan facility with two phases: a land component (drawn at settlement) and a construction component (drawn progressively). Getting this structured correctly from the outset — particularly the timing between land settlement and the start of construction — can materially affect your cash flow and any grant or duty eligibility you’re relying on.
Common Pitfalls We Help Clients Avoid
Underestimating the deposit or contingency needed. Building costs can shift between contract signing and completion; a buffer is wise.
Fixed-price contracts that aren’t fully fixed. Read the provisional sum and prime cost (PC) items carefully — these are often estimates, not final prices, and can add unexpected costs.
Builder delays affecting fixed-rate loans. If part of your loan is fixed and construction runs long, you could face rate changes or break costs partway through — worth discussing with your broker upfront.
Missing loan approval expiry dates. Construction finance approvals typically have a shelf life; delays in getting building approval can mean re-submitting your application.
Building With Confidence
A construction loan involves more moving parts than a standard purchase — but with the right lender and the right structure, it doesn’t need to be stressful. We’ll help you choose a lender comfortable with your builder, your build type, and your timeline, and manage the drawdowns through to completion.
Get Started to talk through your build.
This article is general information only and does not take into account your personal financial situation, needs or objectives. It is not personal financial or credit advice, nor building or legal advice. Construction loan structures, stage names and requirements vary between lenders and builders — always confirm the specifics of your contract and loan with your broker, builder and legal adviser. The information provided on this site is on the understanding that it is for illustrative and discussion purposes only. Whilst all care and attention is taken in its preparation any party seeking to rely on its content or otherwise should make their own enquiries and research to ensure its relevance to your specific personal and business requirements and circumstances. Terms, conditions, fees and charges may apply. Normal lending criteria apply. Rates subject to change. Approved applicants only. Spitfire Finance Pty Ltd ABN 70 700 362 956, ACN 700 362 956 is authorised under LMG Broker Services Pty Ltd ACN 632 405 504 Australian Credit Licence 517192.