Construction and Land Loans: What to Know Before You Build
A construction loan works differently from a standard home loan. The lender usually does not hand over the full building amount at settlement. Funds are released progressively as the build reaches agreed stages.
The right preparation matters because the land price and building contract are not always the full project cost.
How a construction loan works
The lender assesses the land, building contract, plans, specifications, borrower and proposed completed property. Once approved, payments are generally released to the builder in stages after the lender receives a progress claim and any required inspection or valuation.
During construction, interest is commonly charged on the amount drawn rather than the entire approved construction limit. Repayment arrangements vary by lender, so confirm what will be payable while you are also paying rent or another mortgage.
The point many buyers miss
The lender considers the completed value of the property, not simply the total of every invoice you agree to pay.
If land costs $250,000 and the building contract is $450,000, the project appears to total $700,000. But site works, upgrades, landscaping, fencing, driveways, council charges and items outside the contract can increase the cash required. If the completed valuation is lower than the total project cost, the borrower may also need to contribute the shortfall.
Check the full project cost before signing
Land purchase price and settlement costs
Building contract price
Site works, soil tests and engineering
Planning, council and certification fees
Water, power, sewer and other service connections
Driveways, fencing, retaining walls and landscaping
Flooring, window coverings, appliances or air conditioning not included
Variations, price-rise clauses and provisional allowances
Rent or existing loan repayments during construction
A realistic contingency buffer
A low advertised build price can look very different after provisional sums, site costs and exclusions are added.
Typical progress payment stages
Deposit: an initial amount payable under the building contract.
Base or slab: foundations and base work are completed.
Frame: the building frame is completed.
Lock-up: external walls, roof, windows and external doors are in place.
Fit-out: internal fixtures, cabinets, plumbing and electrical work progress.
Completion: the build is inspected and final requirements are met before the last payment.
Stage names and percentages differ between contracts and lenders. The builder’s payment schedule should be reviewed against the lender’s process before the contract becomes unconditional.
Documents a lender may request
Signed fixed-price or eligible building contract
Approved plans, specifications and inclusions
Tender, quotes and variation details
Council or planning approvals when available
Builder licence and required insurance evidence
Land contract and settlement information
Evidence of the borrower’s contribution and contingency funds
A valuation based on the proposed completed home
What happens at each drawdown?
The builder issues a progress claim when a stage is complete. The lender may require the borrower to authorise it and may arrange an inspection before releasing funds.
Do not authorise a payment simply because an invoice has arrived. Check that the work is complete, matches the contract and is satisfactory. Obtain independent building advice where needed. A lender’s inspection is for lending purposes and is not a substitute for your own building inspection.
Variations and cost overruns
Changing the design, finishes or inclusions after approval can affect the budget and valuation. The lender may not automatically increase the loan to cover variations.
Before agreeing to a variation, ask:
What is the full price, including any builder margin?
When must it be paid?
Will the lender fund it or must I pay from savings?
Does it change the completion date?
Will it affect the valuation or loan approval?
Buying land before choosing a builder
It may be possible to settle the land first and arrange the construction loan later, but the timing can change the deposit, loan structure and holding costs. You may need to qualify for the land debt and the future build, and the lender will still assess the final contract and completed value.
If you hope to use the Australian Government 5% Deposit Scheme, check the current eligibility, property price cap and construction timeframes before signing either contract.
Construction loan FAQ
Do I pay interest on the whole approved construction amount?
Interest is commonly charged on funds as they are progressively drawn, but loan and repayment arrangements vary. Ask for an estimate of payments at several stages of the build.
Can I use a construction loan for a house-and-land package?
Often, yes. The lender needs to assess the land and building components, contracts, valuation, builder and borrower. The structure depends on whether the contracts and settlement dates are separate or combined.
Can the 5% Deposit Scheme be used to build?
An eligible buyer may be able to use the Scheme for an eligible house-and-land package or land with a separate building contract. Scheme rules, lender criteria, property caps and construction timeframes all apply.
What if the builder requests more than the lender will release?
Stop and clarify the difference before paying. The contract stage, lender schedule, inspection result or borrower contribution may not align. Do not assume the bank will reimburse an amount paid early.
Can I act as an owner-builder?
Owner-builder lending is more restricted and policy varies significantly. Discuss it before purchasing land or committing to work because lender choice, deposit requirements and documentation can be very different.
Run the numbers before signing the building contract
I can help calculate the full funds position, compare construction loan policies and check the proposed payment schedule before you commit.
Call Lauren on 0458 053 943 or use the “Speak to us today” button to arrange a construction and land loan discussion.