Construction Loan Explained: Everything You Need to Know

Construction Loan

A construction loan is a short-term loan designed to finance the building of a new home or major renovations. Unlike a standard home loan, the funds are released in stages—called progress payments—as construction milestones are completed.

✔ Construction loans typically cover:

✔ Land purchase (if not already owned)

✔ Building costs, including materials and labour

Key features:

✔ Interest is usually charged only on the amount drawn down, not the full loan.

✔ Lenders may require detailed building plans, a fixed-price contract, and approvals before funding.

Construction loans are ideal for first-time builders, home upgraders, and investors who want to finance a property from the ground up.

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Construction Loan: 4 Easy Steps to Finance Your Dream Home

Assess Your Finances and Budget

Before applying, review your savings, income, and credit score. Know your construction costs and have a detailed budget ready to show lenders.

Find the Right Lender or Mortgage Broker

Not all lenders offer construction loans. Compare options from banks, credit unions, and mortgage brokers to find one that offers competitive rates and flexible terms.

Apply for Your Construction Loan

Submit required documents including income proof, bank statements, construction plans, and builder contracts. Your lender will assess your eligibility and project feasibility.

Access Funds and Start Building

Construction loans are typically released in stages (draws) as milestones are completed. Work closely with your lender to ensure smooth funding throughout the build.

Construction Loan Progress Payments Explained

Learn how construction loan progress payments work. Understand staged funding, inspections, and how to manage cash flow during your home build.

Initial payment to secure the land or begin construction. Typically covers the land purchase (if not already owned) and initial project costs.

Payment is released after excavation, slab, and foundation works are completed. Ensures the home has a strong structural base before further work.

Funds are provided once the walls and roof framework are completed. Includes timber or steel framing, floor structures, and basic support elements.

Payment is released when the property is weatherproof with doors, windows, and roofing installed. At this point, the structure is secure from weather, allowing internal works to begin.

Covers internal work such as plumbing, electrical, flooring, kitchen, and bathroom fixtures. Payment is staged based on completion of agreed milestones.

Final payment is made upon completion of all works and when a Certificate of Occupancy or equivalent is issued. Ensures the builder has fulfilled all contractual obligations and the home is ready for use.

construction loan progress payment explained
FIRST HOME BUYER

Next Steps After Completing Your Home Construction

✔ Final Property Inspection – Your lender will schedule an inspection to ensure the property has been built according to the approved plans and specifications.

✔ Switch from Interest-Only to Principal & Interest – During construction, you may have paid interest-only (IO) repayments. After completion, repayments typically switch to principal and interest (P&I), generally due one month after construction finishes.

✔ Mortgage Broker Support – A mortgage broker or home loan broker can help ensure the transition is smooth, confirm repayment schedules, and advise on refinancing or other loan options if needed.

Tip: Staying in close contact with your mortgage broker ensures that all documentation, inspections, and repayments are handled efficiently once construction is complete.

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Frequently Asked Questions

A construction loan is designed for those looking to build a new home, investment property, or make major renovations. Unlike a regular home loan, it lets you make payments to your licensed builder in stages as the construction progresses. This type of loan offers the option of paying only interest during the building phase and only on the amount you have used.

Progress payments allow you to access your construction loan in stages, enabling you to pay your builder at important points during the building process. You will only incur interest on the money you have used. Before making the last progress payment, a satisfactory valuation from one of our valuers is required. This ensures that the construction has been done according to the original plans submitted.

The standard stages of construction are:

1. Preparation – plans, permits, fees, insurance, etc.
2. Foundation – levelling the land, laying the slab, excavations, plumbing, etc.
3. Framing – constructing walls, roof trusses, windows, door frames, etc.
4. Lock-up – adding everything you need to turn your building into a house and locking it up.
5. Fix-up – plastering, sealing, adding your appliances, bathroom installed, etc.
6. Completion – site tidied, fences up, and builders receive final payment.

The disbursement of your loan will occur as needed, meaning you will only incur interest on the amount of the construction loan that you have utilized.

If you’ve chosen a registered builder, you may be asked to provide:

• A signed copy of the Industry Standard Fixed Price Contract
• A copy of building plans and council permits
• A copy of the builder’s licence
• The builder’s bank account details
• Copies of insurance policies, including Builders All Risk/Public Liability Insurance, Domestic/Home Warranty Insurance, and Public Liability Insurance

No. If you want to borrow money for more than just the build (for curtains, blinds, furniture, appliances and so on), you may need a separate loan. Talk to us about your options.

Yes. Participating Lenders offers construction loan under the Home Guarantee Scheme as part of this Australian Government initiative.

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