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[MoreMore Insights] Construction Loan

Nowadays it is quite common for Australians to buy vacant land and build houses on top. But the whole process could be relatively complicated, as it involves multiple parites, like contractors, builders, surveyors, and also local council, bank, solicitors, accountants etc.

The construction loan part will be particularly important, because it is related to the time frame and cash flow of the entire construction process.

Must-do list

Do your research

Whether you are building on existing land or considering buying land to build a new property, it is important to research well in advance. You have to choose the type of property you want to build within a predetermined ideal location and price range, as well as considering the surrounding neighbourhood and infrastructure, and so on. Also, municipal rules and regulations may affect what and how you build, and knowing the rules and following them can help you save time and money.

Choose a builder

It is important to find the right builder. Whether you get a recommendation from a friend or family member or make your own contact, it is essential to check their licence, finding the details of the builder’s licence on the state government website so that you can get a quote from them to select the builder you like.

Get a fixed price building contract

The builder should provide detailed plans and accurate costs for the process and you should ensure that they provide a contract that covers everything and check the timeline for completion of the work. You should always have a solicitor check every clause for you before signing a building contract. Many common building pitfalls are caused by misunderstandings about contracts.

Have your plan approved

Obtaining approval is usually done by your builder on your behalf. It is important that this is done as early as possible as it will take some time to get reviewed and approved by the local council and sometimes changes will need to be made before approval can be granted.

Loan application

The construction loan process is more complex than the standard home loan, which requires a lot of additional documentation to be provided to the bank. The applicant has to prepare documents such as council plan, permits, fixed price building contract and construction cost sheets, after which the bank will arrange a professional valuer to determine the final loan amount. Before each payment is made by the bank, the builder is also required to provide relevant documents. Construction loans are complex, and with the many parties involved, it is easy for small errors to lead to delay. Therefore, no matter which bank you apply to for a construction loan, you should be more patient and, most importantly, choose an experienced mortgage broker who can reduce you a lot of hassle.

Progress drawdown

Progress drawdown is the most important feature of a construction loan. You receive instalment of the loan at each stage of construction, rather than upfront, usually in the following stages:

- Slab

The first stage of construction is to build foundation, level the ground and complete the plumbing and electrical wiring, which requires approximately 15-20% of the capital.

- Frame stage

This step involves completing the framing and wall installation, support structure, electrical plumbing, and gutters, which requires approximately 20% of the capital.

- Lock-up stage

This step usually involves installing the roof, windows and doors, which means you can lock the house you are building, for about 20% of the capital.

- Fit out stage

This step is the cost of installing the interior fixtures of the house, including the lights, drywall, cabinets, plumbing, etc., which requires about 30% of the capital.

- Completion

The final phase, which involves completing contract projects such as fencing and site cleanup, and finishing the final decorations, requires about 10% of the capital. Banks will do a final inspection before the final progress payment.

When Can We Apply for a Construction Loan?

-Renovate existing house by extending and adding bedrooms, bathrooms and living space.

-Demolish the whole building where you live now and build a completely new house.

-Buy a block of land where you want to live and build a new house.


-You can choose where you want to renovate without having to tear it all down. You don’t to move out when renovating, which can save money in rent. Renovation can increase the value of the existing property, so you will get a better price if you decide to sell it later.

-Building a new home gives you the opportunity to plan for the future, for example by building a bigger house with more bedrooms, or having a two-storey house, to create a better living environment for family members.

-You can customise your home to suit your lifestyle, and not spend a lot of money on maintenance it for many years. If this is your first home and you meet the eligibility, you may be able to apply for the state’s grant or scheme.


-Flexibility: Construction loans have interest only payments during the construction period, meaning your repayments are lower throughout this time.

-Convenience: You can make additional payments into your construction loan at any time, which could reduce your loan balance and you may pay less interest.

-Build in stages: Building a property or undertaking major renovations is a big project, so it’s important you know what to expect at each stage. Construction loans give you the flexibility to draw down the loan at various stages of the build. Your progress payment schedule will typically have 5-6 stages during the construction period.

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