Construction loans

Having a house built to your own specifications, or choosing the perfect house and land package, are possibly the best routes for getting a home that’s just right for you. And to make your dream a reality, you’re going to need a construction loan. Compare your options right here.

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Updated 13 Mar 2024   |   Rates updated regularly

Comparing of 3 construction loans for over years

Great Southern Bank Accelerate Variable Home Loan - Construction (Owner Occupier, Interest only)

On website

Great Southern Bank Accelerate Variable Home Loan - Construction (Owner Occupier, Interest only)

Interest rate (p.a.)

7.44%

Comp rate^ (p.a.)

6.83%

Max LVR

90.00%

Application fee

$835.00

Monthly repayment

$3,128.00

Total repayment

$1,126,080.00

Highlights

  • Get a premium home loan complete with 100% offset.
  • Reach your property goals with a competitive rate.
  • Enjoy $0 ongoing fee and free redraw.
  • Maximum LVR is inclusive of LMI.

Having a house built to your own specifications, or choosing the perfect house and land package, are possibly the best routes for getting a home that’s just right for you. And to make your dream a reality, you’re going to need a construction loan, a special type of home loan designed to be drawn down in stages.

Find out everything you need to know about construction loans and compare your options right here.

How construction home loans differ from standard home loans

  • Borrowing capacity. The amount you can borrow for a construction loan, as well as being based on your income and credit rating, will also be calculated as a percentage (e.g. 80%) of the expected value of the house and land when the building is completed.
  • Progressive drawdown. Instead of borrowing this amount in full immediately, borrowers draw down progressive amounts so that they can make payments for the purchase of the land, stamp duty on the land title transfer, payments to the architect (if any), and progressive payments to the builder as the construction proceeds.
  • Interest-only at the start. Construction loans are typically interest-only for the first 12 months, after which time they revert to the standard pattern of repaying both principal and interest. But you may be able to retain it as an interest-only loan if you wish, depending on the lender.

Learn about construction loans

Building a new home? Get helpful answers to your questions about how construction loans work.

  • FAQs

  • Pros & cons

  • Tips

What is a construction loan?

Construction loans are a specific type of home loan designed for borrowers who are having a house newly built for them, rather than buying an existing property. Typically starting as an interest-only loan, the amount able to be borrowed is partly based on the estimated final property valuation, and the loan increases gradually as each progress payment is made.

Will I need a construction loan if I’m buying a house and land package from a major building company?

Yes. It is the best type of loan to apply for in this situation.

If I already own a block of land (with or without a mortgage) can I still apply for a construction home loan?

Yes. But if you already have borrowings secured on the land it may be more difficult to borrow a significant percentage of the estimated final property valuation. You’ll also end up with two separate mortgages.

Can I use a construction loan for carrying out major renovations or remodelling on an existing property?

Yes. Some lenders offer construction loans for this type of work.

Do you need to contract a licensed builder to get a construction loan?

Most lenders will only agree to finance the construction of homes built by licensed builders. That's because the loan will be secured against the property you are building, and they need to be sure that the finished product is a good quality home so that the house and land together are able to be valued at 25% more than the total amount borrowed. This will mean that the Loan to Valuation Ratio (LVR) is no greater than 80%, a ratio which makes the lender feel reasonably comfortable.

However, it is possible to get an owner-builder construction loan – for when you want to DIY all or part of the project – from a limited number of lenders.

What are owner-builder construction loans?

They are loans designed for people who want to DIY the building themselves, or organise some or all of the work to be done by building sub-contractors. Lenders usually see this kind of lending as very risky, since they will be using the property, once completed, as security for the loan. If you do manage to secure this type of loan, you may be able to borrow only a relatively small percentage of the estimated property value (e.g. 60%).

What are the benefits of using a construction loan, rather than a traditional home mortgage, when having a home built?

  • Interest-only at first. The loan is normally interest-only during the construction period. This keeps your repayments low when you may be renting, or paying another mortgage on your existing home before you can sell it and move into your newly-built home.
  • Progressive payments keep builder motivated. The builder does not receive an upfront lump sum, but progressive payments which depend on work being completed in a timely and satisfactory way.
  • No need to draw down full approved amount at the start. You only pay interest on the amount drawn down while the house is being built, not the full final loan amount.

Are there limits on the time allowed for the construction to be completed?

Yes. The borrower will want to see construction beginning as soon as possible after land is purchased, if land purchase forms part of the loan. There will also be a time limit allowed for completion of the construction once it starts, typically 12 months, although it could be as short as six months and as long as 24 months, depending on the lender.

When are progress payments made to the builder during a construction loan?

There are normally five, or sometimes six, recognised stages of the construction that will qualify for progress payments:

  1. Deposit. The first deposit to the builder, before construction begins, not always required.
  2. Base or slab completed. Ground levelling, external plumbing, waterproofing, pouring slab.
  3. Frame completed. Timber or steel frame erected, roofing, trusses, window frames, possibly some brickwork.
  4. Lockup stage. External walls, windows, doors.
  5. Fitout. Internal fixtures like plasterboards, internal plumbing and fittings , electricity, gutters, cupboards, kitchen benches.
  6. Completion. Concluding stages, finishing touches, cleaning.

The lender may send a valuer to check that the work has been completed to an approved standard before they release each progress payment.

As each progress payment is made by the lender to a third party (e.g. land owner, architect, builder) your amount borrowed will increase, until it reaches its maximum amount once the building is complete.

Is there a cost for making the progress payments?

Often, though not always. If the lender does charge for making progress payments, they could charge a one-off fee for making all the progress payments (e.g. $500), or charge a separate fee for each payment (e.g. $100 x 5).

What kind of paperwork is needed when applying for a construction loan?

In addition to the normal documentation to prove your identity and income, you will need to provide the lender with building plans approved by the local council, a fixed-price contract from your builder, and evidence of builder’s insurance.

Do you need a deposit for a construction loan?

Yes. You'll need a deposit in just the same way as you would for a standard home mortgage. The lender will be looking for a deposit that is at least 20% of the estimated final value of the completed house and land, otherwise you'll need to pay for Lender's Mortgage Insurance (LMI) or have a third party (e.g. a family member) acting as guarantor for your loan.

If you already own outright the land on which the house is to be built, or have a large amount of equity in the land, you may be able to use the land value as your deposit, or part of your deposit.

Are interest rates for construction loans higher than the rates for normal home loans?

Interest rates could be higher during the interest-only phase of the loan while the home is being constructed, but may revert to a standard rate when the building is completed and repayments start to include a portion of the principal as well.

What if I want to make changes to the house and the building contract after my construction loan has been approved?

If you want to make changes to the building contract or the approved building plans, at any stage after your loan is approved, you will need to contact the lender to discuss the changes and make sure they are happy with them.

What happens if the builder goes out of business before my house is finished?

In every state and territory except Tasmania, builders must have government-controlled Domestic Building Insurance (DBI) to cover for defective work or non-completion in the event of the builder's insolvency, disappearance or death. Your bank will stop making payments if the builder is insolvent, but you'll still need to meet interest payments on the amount you've already drawn down. You would need to find a new builder to complete the work for a fixed price, submit the new contract to the lender for approval, and make a claim against DBI if you are left out of pocket (i.e. if the price to complete the work exceeds the amount remaining in the original builder's contract).

Are construction loans the only way to finance a home build?

It's the most common way, but not the only way. If you already own a property in which you have a large amount of equity – that is, the value of the property is much greater than the remaining amount of the loan secured on it – you could redraw funds from your existing loan to finance the building of a new property.

Lower interest payments

The progressive payments made to the builder mean that you don't need to draw down your entire loan amount upfront. In fact, you won't be charged interest on your total borrowing until the final progress payment has been made, which saves you quite a bit in interest charges.

Temporary interest-only payments

Another reason why your payments will be lower at first is because you'll pay just interest on the amount drawn down until the building is completely finished. Only then will your lender ask you to start repaying a part of the loan principal , plus interest charges, in each of your periodic repayments. This gives you some breathing space during which you can get used to the discipline of regular loan repayments, as well as build up your savings to act as a buffer against possible future financial difficulties.

Only pay for a good result

Since the builder won't receive payments from the lender until you are satisfied with the work that has been done at each stage, you are protected to some extent against poor workmanship. An extra level of protection comes from the involvement of the lender's valuer, who will check that the agreed amount of work has been done to an acceptable standard at some of the construction stages, and possibly at all of them.

Pay less stamp duty

When you buy an existing home, the amount of stamp duty you have to pay on the property transfer is calculated based on the total value of the land plus the buildings on it. But with a new build financed by a construction loan you are only purchasing land at first, because the building doesn't exist yet. So you only pay stamp duty on the land value, not the estimated finished value including the building.

More risk involved for the borrower

Financing a new build can be a risky prospect. You might overrun your budget if you make changes to the fixed-price contract, or your build could be delayed by bad weather, material sourcing difficulties or a disorganised builder. You're also relying on the finished product being worth as much as you – and the lender – thought it would be, which is not always the case.

Time-consuming

Applying and getting approved for a loan for a new build will often take longer than it does for a standard mortgage, simply because of the extra paperwork involved. And the approval process for each progress payment can sometimes hold up the start of the next building stage.

Can be more expensive

Construction loans can often have a slightly higher interest rate than a standard loan during the initial interest-only period, but you should be able to negotiate a better rate once the build is complete and it reverts to a standard loan. There are also potential additional fees involved with construction loans, such as progress payment fees and extra valuation fees.

You may need a bigger deposit

Lenders are more likely to insist on a lower Loan to Valuation Ratio (LVR) for a construction loan than if the same borrower were buying an existing home. Construction loans are riskier from the lender's point of view, so as well as charging more in interest and fees they will often be looking for a bigger deposit.

Choose a good builder

It might sound like stating the obvious, but choosing a reliable and financially sound builder is the best way to get a good outcome from your construction loan. If your builder performs well you should have no problem with confirming to the lender that the work has been done, or having the lender's valuer make that confirmation, prior to the release of each progress payment.

Organise your paperwork

Try to give the lender all the necessary documentation in one go – the final building plans approved by the local council, a fixed-price contract from your builder, and evidence of builder’s insurance. Don't forget that the bank will check your credit report as part of the loan application, so make sure that there are no problems lurking there before submitting.

Don't try to build the best house in the street

If you spend too much money on the build compared with the land value, you are over-capitalising. The result will be that the lender may place an estimated value on the completed house and land that is lower than your land purchase price plus building costs. This may make it difficult for you to get the full amount of finance you need, and over-capitalising is not a good investment strategy in any case.

Use government assistance if you're a first-time buyer

If your construction loan will be financing your very first home purchase, there are a number of government schemes that will help you to provide the deposit and/or lower your costs, including:

  • First Home Loan Deposit Scheme (FHLDS): Government guarantee of loans so that you can avoid Lender's Mortgage Insurance. See National Housing and Investment Corporation.
  • First Home Owner Grant (FHOG): You may be able to apply for a first-home-buyer grant offered by various state and territory governments. Check your state's details at firsthome.gov.au.
  • First Home Super Saver Scheme (FHSSS): First-time buyers can save for a deposit through their superannuation with the help of tax concessions. See the ATO's First home super saver scheme page.
  • Stamp duty concessions: Concessions in some states on the stamp duty payable on property transfer for first home buyers.
  • LMI duty concessions: Concessional stamp duty on LMI in some states.

Compare all features of loans on offer

When comparing different construction loans to decide which one is best for you, don't just look at the advertised interest rate and choose the lowest. You'll also need to compare the other features of the loans, including:

  • The comparison interest rate, a theoretical interest rate which builds in the cost of the fees you are likely to incur.
  • All of the possible fees (application fee, switching fee, break fee, early exit fee) because the comparison rate may only include the unavoidable fees and charges.
  • The loan's extra features, such as extra repayment and redraw facilities, and an offset account.
  • Whether there is a choice of repayment terms – e.g. 20 years, 25 years, 30 years.

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