Key difference: A construction loan releases money in stages as your build progresses. You only pay interest on the amount drawn down so far. A regular home loan gives you the full amount at settlement and you start repaying immediately.
If you’re building a home, you can’t use a standard home loan — you need a construction loan. Here’s how they work and what to watch for.
Side-by-Side Comparison
| Feature | Construction Loan | Standard Home Loan |
|---|---|---|
| How funds are released | In stages (progress drawdowns) | Full amount at settlement |
| Interest during build | Interest-only on drawn amount | Full P&I from day one |
| Loan term | Construction phase (12-18mo) then converts to standard | 25-30 years |
| Valuation | Based on plans + specs (future value) | Based on existing property |
| LVR | Typically max 80-90% | Up to 95% with LMI |
| Documentation | Building contract, plans, council approval required | Standard employment/income docs |
| Redraw during build | Usually not available | Available |
| Rate | Often slightly higher (0.1-0.3%) | Standard rates |
How Progress Drawdowns Work
Construction loans release money in 5-6 stages, aligned with your building contract:
| Stage | What’s Completed | Typical % | Cumulative |
|---|---|---|---|
| Deposit | Contract signed | 5% | 5% |
| Slab/Base | Concrete slab poured | 15% | 20% |
| Frame | Walls and roof frame up | 20% | 40% |
| Lock-up | Roof on, windows in, external walls | 20% | 60% |
| Fixing | Internal walls, kitchen, bathrooms | 25% | 85% |
| Completion | Final finishes, handover | 15% | 100% |
At each stage, your builder invoices the bank. An independent valuer inspects the work. If satisfactory, the bank releases the next payment.
What You Pay During Construction
Interest-only on the cumulative amount drawn down:
| Stage | Amount Drawn | Monthly Interest (at 6%) |
|---|---|---|
| After deposit ($30K of $600K loan) | $30,000 | $150 |
| After slab | $120,000 | $600 |
| After frame | $240,000 | $1,200 |
| After lock-up | $360,000 | $1,800 |
| After fixing | $510,000 | $2,550 |
| After completion | $600,000 | $3,000 → converts to P&I |
Total interest during a 12-month build: approximately $18,000–$22,000 (less than full P&I from day one).
Know your numbers before you apply
Use our free calculator to estimate your total build cost — the number your lender will need.
What to Look For in a Construction Loan
- Interest rate — compare the variable rate during construction AND the rate it converts to
- Progress payment flexibility — some lenders allow custom drawdown stages
- Valuation process — how long does each inspection take? (Delays = extended build time)
- Fees — establishment fee, progress payment fees, conversion fee
- LVR — maximum loan-to-value ratio offered
- Pre-approval validity — how long does pre-approval last? (Building takes months)
- Builder requirements — some lenders have approved builder lists
Common Questions
Can I get a construction loan with a 5% deposit?
Some lenders offer construction loans with 5-10% deposit, but you’ll pay Lenders Mortgage Insurance (LMI). Most construction loans require 10-20% deposit. The First Home Buyer Guarantee (federal) may allow 5% without LMI.
What happens if my builder goes bust during construction?
Your home warranty insurance (mandatory in most states) should cover you for completion of the build. The bank may also require your builder to carry domestic building insurance. Always verify your builder’s insurance before signing.
Can I use my land as equity?
Yes — if you already own the land, its value counts toward your deposit/equity. If your land is worth $300K and you need a $600K construction loan, the land provides 50% equity (50% LVR).
What happens when construction is complete?
The construction loan automatically converts to a standard home loan (P&I repayments). Some lenders let you choose a new product at this point — shop around before it converts.
General information only. Consult a mortgage broker or financial adviser for personalised advice.
Related Guides
- Cost to Build in Melbourne — Know what you’re borrowing for
- First Home Owner Grant VIC — $10,000 grant
- Stamp Duty VIC — Save on upfront costs
- How Much to Build — National cost guide
