Construction Loan vs Mortgage: Complete Guide for First Home Builders 2025

 

What is a Construction Loan?

 

A construction loan (also called a building loan) is a specialised short-term home loan designed specifically for people building a new home or undertaking major renovations. Unlike a traditional mortgage where you receive the full loan amount at settlement, construction loans release funds in stages based on completed milestones, meaning you only pay interest on the amount that’s been released so far.

Think of it as a step-by-step funding setup that aligns with your build timeline. As your home progresses from an empty block to a livable house, your lender releases money to your builder at key construction milestones – not all at once.

 

Key Features of Construction Loans

 

Interest-only repayments during construction: Most construction loans are interest-only during the construction period (typically up to 12 months) to reduce your repayments during that time. You’re only paying interest on what’s been drawn down, not the full loan amount.

Progressive drawdown structure: Funds are released in stages as different milestones are hit in the construction project, rather than all in one go.

Converts to standard mortgage: Once construction is complete, your loan automatically converts to a regular principal and interest mortgage (usually over a 25-30 year term).

Variable rates: In almost all cases, construction loans come with variable interest rates, as these rates are the most flexible and suitable for drawing down on the debt to make progress payments.

 

What is a Standard Mortgage?

A standard home loan (or mortgage) is what most people use when buying an existing, already-built property. The lender approves you for a specific amount, and once you settle on the property, the full loan amount is paid to the seller in one lump sum.

From day one, you start making principal and interest repayments on the entire loan amount. Standard mortgages come with either fixed or variable interest rates and typically run for 25-30 years.

 

When You’d Use a Standard Mortgage

• Buying an established home
• Purchasing a house-and-land package that’s already complete
• Buying off-the-plan where the property is finished at settlement
• Refinancing an existing property

 

How Construction Loans Work: The Complete Process

 

Before the first shovel hits the dirt, your builder and lender agree on the total build cost and a payment schedule. From there, it’s a carefully choreographed dance: your builder hits a milestone, sends an invoice, gets an inspection, and the bank releases funds. Rinse and repeat.

 

The 5 Construction Stages and Progress Payments

 

Construction loans are divided up as per your building contract, which includes a progress payment schedule detailing the individual stages of construction and what percentage of the build price is due at each stage.

Here’s how a typical construction payment schedule works:

Stage	What Happens	Typical % of Contract	When Payment Released
1. Deposit	Plans approved by council, permits in place	5%	Before construction starts
2. Base/Slab	Site preparation, foundation poured, plumbing started	15-20%	After slab inspection
3. Frame	Structural skeleton erected, roof trusses installed	15%	After frame inspection
4. Lock-Up	External walls, windows, doors installed — house is secure	35%	After lock-up inspection
5. Fixing/Fit-Out	Plaster, cabinetry, electrical, plumbing fixtures	20%	After fixing inspection
6. Handover	Paint, flooring, final touches, clean	10%	Final inspection complete

 

Important note: According to Master Builders Australia‘s latest analysis of Australian Bureau of Statistics data, detached houses are now averaging 11.5 months from approval to completion during 2024-25, down from the peak of 12.7 months in 2023-24. This represents a 40% increase from the average of nine months in 2010-11, though build times are finally starting to improve thanks to easing supply chain pressures and modest improvements in labour availability. Build times can still vary significantly depending on your location, builder, and complexity of the build — with some projects taking 8-10 months and others extending to 14-18 months.

 

Real Example: How Interest is Calculated During Construction

 

Let’s look at a real scenario to understand how construction loan repayments work.

Loan details:

• Total construction loan: $500,000
• Interest rate: 6.5% p.a. (variable)
• Build timeline: 6 months (typical stages with 4-week gaps)

Here’s how your interest charges build up:

Stage	Amount Drawn	Total Drawn	Monthly Interest (approx)
Deposit (5%)	$25,000	$25,000	$135
Base (20%)	$100,000	$125,000	$677
Frame (15%)	$75,000	$200,000	$1,083
Lock-up (35%)	$175,000	$375,000	$2,031
Fixing (20%)	$100,000	$475,000	$2,573
Handover (10%)	$50,000	$500,000	$2,708

 

Total interest paid during 6-month construction period: approximately $9,207

Compare this to a standard mortgage where you’d pay interest on the full $500,000 from day one — that would cost you approximately $16,250 over the same 6 months. That’s a saving of around $7,000 just during the construction period.

 

Construction Loan vs Standard Mortgage: Key Differences

 

Let’s break down the critical differences between these two loan types:

 

1. Funding Flow

Construction loan: Funds trickle out in stages as work is completed and inspected. You might receive 5-6 separate payments over 6-12 months.

Standard mortgage: The full loan amount hits the seller’s account on settlement day – one payment, done.

For builds, that drip-feed setup helps you stay agile and avoid overcommitting cash too early. It also means your builder can’t run off with your money before completing the work.

 

2. Interest Payments

Construction loan: You only pay interest on what you’ve used – not the full approved amount. If only $125,000 has been drawn down, you’re only paying interest on $125,000. That means significantly lower repayments while your home’s in progress.

Standard mortgage: Interest charges start on the full loan amount from day one, regardless of whether you’re living in the property yet.

 

3. Repayment Type During Construction

Construction loan: Interest-only repayments during the build period (usually capped at 12 months). This keeps your repayments as low as possible while you’re potentially paying rent elsewhere.

Standard mortgage: Principal and interest repayments from day one. You’re paying down the loan balance immediately.

 

4. Interest Rates

Construction loan: In most cases, you can expect to receive a slightly higher interest rate on a construction loan than a standard home loan, as the risk profile is greater for vacant blocks of land than completed homes. Expect rates to be around 0.2-0.5% higher than standard variable rates.

Standard mortgage: Generally lower rates, especially if you’re buying an established property with a decent deposit. More loan options available (fixed, variable, split).

 

5. Loan Approval Complexity

Construction loan: More documentation required than a typical home loan application, as lenders need to assess both your financial position and the building project itself.

You’ll need:

• Building contract with fixed price
• Council-approved plans and permits
• Builder’s insurance and licenses
• Detailed building specifications
• Property valuation (of completed home)
• Progress payment schedule

Standard mortgage: Simpler approval. You need proof of income, deposit, and property valuation. Less paperwork, faster approval.

 

6. Loan Conversion

Construction loan: Once construction is complete, your loan automatically shifts into a standard mortgage. From there, you’ll start making regular principal and interest repayments over your agreed term (usually 25-30 years).

Standard mortgage: No conversion needed – you’re already on a standard mortgage from day one.

 

7. Fees and Charges

Construction loan: Additional fees apply, including:

• Progress payment/drawdown fees: $100-$300 per payment (so $600-$1,800 over a typical 6-stage build)
• Multiple inspection fees: $150-$400 per stage
• Valuation fees: $200-$600
• Building insurance during construction

Standard mortgage: Standard application and settlement fees. No progressive payment fees.

 

Pros and Cons of Construction Loans

The Upsides

Interest only charged on released funds: This is the big one. You could save thousands during the build period compared to paying interest on the full amount.

Helps balance your cash flow during the build: Lower repayments during construction means you can manage rent, living expenses, and build costs simultaneously.

More transparency and oversight on progress: Each stage requires an inspection and sign-off before funds are released. This protects you from dodgy builders and ensures quality work.

Tailored specifically for new builds: Construction loans are designed with the building process in mind, including longer settlement periods and staged payments.

Control over the building process: You have input on selections, materials, and timing. You’re building exactly what you want.

Potential for lower overall costs: Building can sometimes be cheaper than buying established, especially in high-demand areas. Plus, everything is brand new with builder’s warranties.

 

Things to Note

Slightly higher interest rates: Construction loans typically have higher interest rates than standard home loans due to the greater risk profile. Expect to pay around 0.2-0.5% more.

More paperwork and approvals: Each stage requires inspection sign-off, builder invoices, and bank approval before funds are released. It’s more administrative work.

Variable rates typically apply: Most construction loans don’t offer fixed-rate options during the construction period. You’re exposed to rate increases during your build.

Build delays cost you: If your build takes longer than expected (which happens), you’re paying interest-only for longer and potentially extending your temporary accommodation.

Need contingency funds: Many construction projects face unexpected cost overruns. It’s vital to have contingency plans for extra funding in place as your lender may not agree to increase the loan amount. Budget an extra 5-10% for variations and surprises.

Can’t lock in low fixed rates: If interest rates are low, you can’t lock them in during construction. You’re stuck with variable rates until the build completes.

 

Who Needs a Construction Loan?

You need a construction loan if you’re:

• Building a brand new home on vacant land
• Knocking down an existing property and rebuilding (knockdown-rebuild)
• Undertaking major structural renovations (not just cosmetic updates)
• Building a house-and-land package where construction hasn’t started
• Acting as an owner-builder (though these are harder to get approved)

You DON’T need a construction loan if you’re:

• Buying an established home
• Purchasing a completed house-and-land package
• Buying a display home
• Making minor renovations (use a personal loan or redraw instead)

 

Construction Loan Eligibility: What Lenders Look For

Getting approved for a construction loan requires a bit more from you than a standard mortgage. Here’s what lenders want to see:

Financial Requirements

Deposit: For first home builders, you have options. While traditionally lenders prefer 10-20% deposit, you might qualify for the First Home Guarantee with as little as 5% deposit and no Lenders Mortgage Insurance (LMI). If you have less than 20% saved, you’ll typically pay LMI (which can range from a few thousand to tens of thousands depending on your loan size), unless you’re eligible for the government guarantee scheme.

Stable income: Lenders want to see consistent income that can cover both your current accommodation (rent or mortgage) and your construction loan repayments simultaneously.

Good credit history: A credit score above 600 is ideal. Any defaults or missed payments will make approval harder, so it’s worth checking your credit score before you apply.

Manageable debt levels: Most lenders cap your total debt at around 6-7 times your annual income. If you’re carrying car loans or personal loans, consider paying these down before applying.

 

Builder and Property Requirements

Licensed registered builder: Lenders typically only finance construction of homes built by licensed, registered builders with proper credentials. Owner-builder loans are much harder to get approved and often require special circumstances.

Fixed-price building contract: Your contract must specify the total build cost upfront. Cost-plus contracts (where the final price isn’t locked in) are rarely accepted by lenders because there’s too much uncertainty.

Council-approved plans: All plans and permits must be approved before you can get loan approval. No approvals means no loan, so make sure this is sorted early.

Builder’s insurance: Your builder must have adequate home warranty insurance and public liability insurance. This protects you if something goes wrong.

Property valuation: Lenders require a valuation of the completed home (not just the land value). The valuation must support the total loan amount you’re requesting.

 

Construction to Permanent Loan: The Seamless Transition

One of the best things about construction loans is that they’re designed to automatically convert into a standard mortgage once your build is complete. This is often called a “construction-to-permanent loan” or “single-close construction loan.”

Here’s how the conversion works:

During construction (months 1-12): You make interest-only repayments on the amount drawn down. Your rate is variable during this period.

At practical completion: Once your builder hands over the keys and you receive your occupancy certificate, the lender conducts a final inspection and valuation.

Conversion to standard mortgage: Your loan automatically converts to a principal and interest mortgage. At this point, you can often:

• Choose between fixed or variable rates (or split between both)
• Set up offset accounts to reduce interest
• Make extra repayments without restriction
• Refinance to a different lender if you find a better deal

Important: Some lenders allow you to lock in a fixed rate at the start of your construction loan (even though you’re on variable during the build). This means once construction finishes, you automatically roll onto that pre-agreed fixed rate. This can be really valuable if rates are rising and you want to lock in today’s rates for tomorrow.

Which Major Banks Offer Construction Loans?

Most major Australian banks and lenders offer construction loans. Here’s what some of the big players provide:

Commonwealth Bank (CBA): Offers construction loans with progress payments at each stage. CBA allows you to lock in a fixed rate during construction, which activates once the build is complete. Interest-only period available during construction.

Westpac: Provides construction loans with competitive variable rates. Westpac offers the ability to split your loan once construction completes, allowing you to fix part and keep part variable.

ANZ: Construction loans available with variable rates during build. ANZ offers a Construction Loan Package with fee waivers and discounted rates for eligible borrowers.

NAB: Offers construction loans with the option to lock in a fixed rate at the start that applies once construction completes. NAB also allows up to 12 months interest-only during construction.

Bankwest: Known for competitive construction loan rates. Offers progress payments and interest-only during the build period.

Beyond major banks: Many smaller lenders, credit unions, and non-bank lenders also offer construction loans, often with more competitive rates or flexible terms. It’s worth speaking with a mortgage broker who can compare options across multiple lenders and find deals you won’t see advertised.

How to Apply for a Construction Loan: Step-by-Step

 

Applying for a construction loan involves more steps than a standard mortgage, but don’t let that intimidate you. A mortgage broker can help you navigate the process and compare options from multiple lenders. Here’s the process broken down:

Step 1: Get Your Finances in Order

• Check your credit score (you can do this for free through various websites)
• Start saving your deposit — first home builders can access the First Home Guarantee with as little as 5% deposit
• Gather proof of income (recent payslips, tax returns if you’re self-employed)
• Review your budget honestly and work out your borrowing capacity

Step 2: Find Your Land and Builder

• Purchase your land (or have land secured with a deposit)

• Choose a registered, licensed builder — check their reviews and previous work
• Obtain council-approved plans and permits (your builder can help with this)
• Get a fixed-price building contract signed that clearly outlines what’s included

Step 3: Get Property Valued

• Arrange a valuation of the completed home (not just the land)
• The valuation must support your total loan amount (land value + build costs)
• Some lenders arrange this for you as part of the application

Step 4: Submit Loan Application

• Complete the construction loan application with your chosen lender
• Submit all required documentation:
  • Proof of income and assets
  • Building contract with progress payment schedule
  • Council-approved plans and permits
  • Builder’s insurance and licenses
  • Property valuation
  • Deposit confirmation (bank statements showing your savings)

Step 5: Loan Assessment and Approval

• Lender reviews your application (typically takes 2-4 weeks, sometimes longer)
• They assess both your financial position and the building project itself
• Conditional approval issued with any outstanding requirements listed

Step 6: Formal Approval and Settlement

• Meet any conditions of approval (might include providing additional documents)
• Sign loan documents
• Settle on the land purchase
• Construction can begin once everything is finalised

Step 7: Progress Payments During Build

• Builder completes each stage
• Builder submits invoice to lender
• Lender arranges inspection to verify work is complete
• Once approved, funds are released directly to builder
• You pay interest only on amount drawn down so far

Step 8: Final Inspection and Conversion

• Builder completes construction
• Final inspection conducted by lender
• Occupancy certificate issued by council
• Loan converts to standard principal and interest mortgage
• You move in and start making full repayments (principal + interest)

Construction Loan Rates: What to Expect in 2025

Construction loan interest rates are typically variable and slightly higher than standard variable home loan rates due to the increased risk profile for lenders.

As of November 2025, here’s what you can generally expect:

Standard variable home loan rates: 6.00% – 6.80% p.a. Construction loan rates: 6.20% – 7.20% p.a.

The difference usually ranges from 0.20% to 0.50% higher than standard rates. However, rates vary significantly between lenders, so it’s essential to compare options.

Factors that affect your construction loan rate:

• Your deposit size (larger deposit usually means better rate)
• Your credit score and history
• Loan-to-value ratio (LVR) – the less you need to borrow relative to property value, the better
• Whether you’re a first home buyer (some lenders offer discounts)
• The lender you choose
• Current market conditions and RBA cash rate movements

Remember: Even a 0.25% difference in your interest rate can save you thousands over the life of your loan, so it’s absolutely worth shopping around or using a mortgage broker to compare.

 

Common Construction Loan Mistakes to Avoid

 

1. Underestimating the total cost: Budget for a 5-10% contingency buffer on top of your quoted build price. Variations, unexpected site issues, and upgrades will almost certainly happen.
2. Not reading the building contract carefully: Understand exactly what’s included in the fixed price and what costs extra. Are stone benchtops standard or an upgrade? Is landscaping included? What about fencing? Driveway? These questions matter.
3. Choosing a builder based only on price: The cheapest quote isn’t always the best value. Check builder reviews, look at their previous work, verify their license status, and ensure they have strong financial backing. A builder going bust mid-project is an absolute nightmare.
4. Forgetting about living expenses during construction: You’ll likely be paying rent or a mortgage elsewhere while your home is being built. Factor this into your budget — you’re essentially paying for accommodation twice during the build period.
5. Not having buffer funds for delays: Build delays are incredibly common (weather, material shortages, labor issues, permit delays). If your 6-month build takes 9 months, you’re paying interest-only for longer and potentially extending rental payments. Have a financial buffer.
6. Skipping the fixed-rate lock option: If rates are currently favorable, consider locking in a fixed rate that activates post-construction, even if you pay variable during the build. This protects you from rate rises.
7. Not understanding progress payment timing: Know exactly when each payment is due and ensure you have enough in your offset or savings to cover interest payments during the build. Cash flow management is crucial.
8. Ignoring the fine print on variations: Many builders make money on variations (changes to the original plan). Understand how variations are priced and approved before you sign anything.

 

Construction Loan vs Mortgage: Which Should You Choose?

 

The answer depends entirely on your situation and what matters most to you:

Choose a construction loan if you:

• Are building a new home from scratch on land you own or are buying
• Want complete control over the design, layout, and specifications
• Have time to manage the building process (realistically 8-18 months from start to finish)
• Want to save money on interest during construction by only paying on drawn amounts
• Are willing to deal with more paperwork, inspections, and administrative tasks
• Have found land you love and want to build your dream home exactly how you want it

Choose a standard mortgage if you:

• Want to move in immediately or within a few months
• Are buying an established home or completed house-and-land package
• Prefer simplicity with less administrative burden and fewer moving parts
• Want more loan product options and flexibility (fixed, variable, split rates)
• Don’t want to manage builders, potential delays, and construction risks
• Need certainty on total costs upfront with no surprises

The middle ground: If you’re torn between building and buying established, consider purchasing a house-and-land package where construction is already underway or nearing completion. You might still need a construction loan, but the timeline is shorter and more predictable.Let’s look at a realistic timeline and cost breakdown for a typical first home builder to give you an idea of what the journey actually looks like:

 

Meet Sarah and Tom – First home buyers building in Melbourne’s outer suburbs

 

• Land purchase: $350,000 (settled in March)
• Build cost: $300,000 (fixed price contract, 6 stages)
• Total cost: $650,000
• Deposit: $32,500 saved (5% using First Home Guarantee to avoid LMI)
• Total loan: $617,500 (land + build minus deposit)
• Construction loan rate: 6.5% variable
• Build timeline: 8 months planned, 10 months actual (March to December with delays)

Their construction loan journey:

Month 1 (March): Land settles, construction loan begins. Paying interest on $350,000 land portion while waiting for permits and site prep. Monthly interest: $1,896. Still paying $1,800/month rent on their apartment.

Month 2 (April): Deposit paid to builder (5% = $15,000), slab completed (20% = $60,000). Total drawn: $425,000. Monthly interest: $2,302. Still renting.

Month 3-4 (May-June): Frame completed (15% = $45,000). Total drawn: $470,000. Monthly interest: $2,546. Still renting. Exciting to see the house taking shape.

Month 5-6 (July-Aug): Lock-up stage completed (35% = $105,000). Total drawn: $575,000. Monthly interest: $3,115. Still renting. Starting to feel real now with windows and doors in.

Month 7-8 (Sept-Oct): Fixing stage (20% = $60,000). Total drawn: $635,000. Monthly interest: $3,440. Still renting. Choosing final colors and finishes.

Month 9 (November): Weather delays push back handover. Still at fixing stage. Monthly interest: $3,440. Still paying rent and interest during the delay.

Month 10 (December): Handover finally happens (10% = $30,000). Total drawn: $665,000. Practical completion achieved, occupancy certificate received. Loan converts to standard P&I mortgage. They move in just before Christmas.

Total interest paid during 10-month construction: Approximately $29,442 (more than expected due to 2-month delay)

New monthly repayment after conversion: $4,203/month (principal + interest) compared to the varying interest-only payments during construction.

What Sarah and Tom learned:

• Having a contingency buffer was absolutely essential (they needed an extra $12,000 for variations they hadn’t budgeted for)
• Build delays of 2 months cost them an extra $7,000 in rent and interest they hadn’t planned for
• Interest-only during construction kept their monthly costs manageable while paying rent, but they had to budget carefully
• The jump from interest-only ($3,440) to principal and interest ($4,203) was noticeable — they were glad they’d budgeted conservatively
• Communication with their builder and lender was crucial — staying on top of everything helped avoid bigger issues
• Despite the stress and delays, they’re thrilled with their new home and the fact they built exactly what they wanted

Tips for First Home Builders: Making Your Construction Loan Work

1. Build your deposit while planning: Construction projects take months to plan, get permits, and organise contracts. Use this time to save aggressively. Even if you’re using the 5% First Home Guarantee, having extra savings for contingencies makes life much easier.
2. Get pre-approval before choosing land: Know your borrowing capacity before you fall in love with a block you can’t actually afford. Pre-approval also strengthens your negotiating position with sellers and builders.
3. Compare multiple lenders: Construction loan rates, fees, and terms vary significantly between lenders. A mortgage broker can help you access rates from multiple lenders and find deals you won’t see advertised online. Broker services are usually free for you (they’re paid by the lender).
4. Choose your builder carefully: This can’t be stressed enough. Research builder reviews on Google and ProductReview, look at their previous completed homes, verify their license status on your state’s building authority website, and ensure they have strong financial backing. Ask for references and actually call them. A builder going bust mid-project is a nightmare scenario you want to avoid.
5. Understand exactly what’s included: Go through your building contract line by line. Know exactly what’s in your fixed-price contract. Are appliances included? What quality are the fixtures? What about landscaping, fencing, driveway, letterbox, clothesline? These “extras” can add $20,000-$50,000 to your final cost if not included.
6. Budget realistically for everything: Beyond your build cost, you need to budget for stamp duty on land purchase, legal fees, inspection fees, council fees and permits, utility connections (water, electricity, gas), interim accommodation costs (rent), and lifestyle expenses (you still need to eat and live during the build).
7. Maintain good communication: Stay in regular contact with your builder and lender. Respond quickly to requests for information or documentation to avoid delays. Visit your build site regularly (weekly if possible) to check progress and spot any issues early.
8. Keep detailed records: Save every single document — invoices, contracts, emails, variations, inspection reports, permits, correspondence with builder and lender. Take photos at every stage. You’ll need these for loan drawdowns and they’re invaluable if any disputes arise.
9. Plan for the unexpected: Weather delays, material shortages, permit hold-ups, labor shortages — builds rarely go 100% to plan. Having financial buffers (aim for 10% of build cost) and mental resilience helps you manage the inevitable stress and surprises.
10. Think about where you’ll live: Factor rent or mortgage payments on your current home into your overall budget. You’ll be paying this alongside construction loan interest for 8-12+ months. Some first home builders move back with parents temporarily to save money during the build — not glamorous, but financially smart.
11. Don’t skip the building inspections: Even though your lender conducts inspections at each stage, consider hiring an independent building inspector for key milestones (especially slab, frame, and pre-handover). It costs a few hundred dollars but can save you thousands by catching issues early.
12. Understand your rights: Know your consumer rights as a homeowner. Each state has different building regulations and dispute resolution processes. Familiarise yourself with the Home Building Compensation Fund in your state.

Final Thoughts: Construction Loan or Mortgage?

Construction loans and mortgages both serve the same purpose: helping you own a home. The right fit depends on whether you’re building fresh or buying ready-made.

If you’re leaning toward a build, a construction loan is designed to keep things smooth and structured. Yes, there’ll be more moving parts than buying established, and yes, you’ll need patience when delays happen. But having the right information and support means you can go into your build with control and confidence.

Take your time, ask questions, and seek professional advice when you need it. The process might feel overwhelming at times, but the end result — walking into your brand new home — is absolutely worth it.

Because let’s be real — that slab isn’t just concrete. It’s the foundation of your place. 

 

Frequently Asked Questions About Construction Loans

Can I get a construction loan with a 5% deposit? Yes. As a first home buyer, you can access the First Home Guarantee scheme which allows you to purchase with as little as 5% deposit without paying Lenders Mortgage Insurance (LMI). This makes building much more accessible for first home builders who haven’t saved a full 20% deposit. You’ll need to meet eligibility criteria including income limits and property price caps.

What happens if my builder goes bust mid-construction? This is why builder’s insurance (home warranty insurance) is mandatory in Australia. The insurance covers completion of your build if your builder goes bankrupt, dies, or disappears. Your lender will also have protections in place. It’s stressful, but you are protected.

Can I make changes to the build once the loan is approved? Minor changes are usually fine, but major variations that significantly change the cost require lender approval and contract amendments. This can delay your build and impact your loan. Try to get everything you want locked into the initial contract to avoid this.

What if my build goes over budget? Your lender may increase your loan amount if you can demonstrate you can still afford the repayments, but it’s not guaranteed. This is why having a 5-10% contingency buffer is absolutely crucial. Some borrowers need to access personal savings or personal loans to cover overruns.

Do I pay interest on the full loan amount immediately? No — this is the main benefit of construction loans. You only pay interest on the amount that’s been drawn down and released to your builder. If only $100,000 has been released, you’re only paying interest on $100,000, not your full approved loan amount.

How long does construction loan approval take? Typically 2-4 weeks, sometimes longer if there are complications or missing documentation. It’s more complex than standard mortgage approval because lenders need to assess your building contract, builder credentials, plans, permits, and valuations in addition to your financial position.

Can I live on the land during construction? Generally no. Most councils and lenders don’t allow you to live on-site during construction for safety and insurance reasons. You’ll need alternative accommodation (usually renting) until practical completion and you receive your occupancy certificate.

What’s the difference between practical completion and final completion? Practical completion is when your home is livable and you receive your occupancy certificate from the council — this is when you can legally move in. Final completion is when every single item on your defects list is resolved and everything is 100% finished. Your loan typically converts to a standard mortgage at practical completion, not final completion.

Can I use a construction loan for renovations? Yes, but only for major structural renovations that significantly add value to the property. Small cosmetic updates (new kitchen, bathroom refresh, painting) won’t qualify for a construction loan. Knockdown-rebuilds are commonly financed with construction loans.

What if interest rates rise during my build? Because construction loans are typically variable, you’re exposed to rate rises during the build period. Your monthly interest payments will increase if rates go up. Some lenders allow you to lock in a fixed rate at the start that activates once construction completes, which protects you from future increases.

What is Lenders Mortgage Insurance (LMI) and do I have to pay it? LMI is insurance that protects the lender (not you) if you can’t make your repayments. It’s typically required if your deposit is less than 20% of the property value. LMI can cost anywhere from a few thousand to over $30,000 depending on your loan size. However, first home buyers can avoid LMI by using the First Home Guarantee scheme with as little as 5% deposit.

Disclaimer: This article provides general information only and does not constitute financial advice. Construction loan rates, terms, and eligibility criteria vary between lenders and change regularly. First home buyer schemes and grants have specific eligibility requirements and change over time. Always consult with a qualified mortgage broker or financial advisor before making construction loan decisions. Building timelines and costs mentioned are estimates and can vary significantly based on location, builder, project complexity, and market conditions.