Building your dream home is exciting, but the finance works differently from buying an existing home. A standard home loan pays the full amount at settlement. A construction loan does not. So, how do construction loans work? The lender releases the money in stages, called progress payments, as your builder finishes each part of the build. You pay interest only on the amount drawn so far, and the loan switches to normal principal and interest repayments once the home is finished.
This guide explains the full construction loan process in Australia for 2026. Whether you want to build a new home from scratch, do a knockdown rebuild or take on a renovation or new build as an investor, it covers the five build stages, how interest is calculated, how much you can borrow, the documents lenders need, first home buyer help and what happens at completion. Everest Home Loans, led by Nepali mortgage broker Rajesh Kandel, helps first home buyers, families and investors arrange construction finance in English, Nepali and Hindi.
Key Takeaways
A construction loan releases funds in stages (slab, frame, lock-up, fixing and completion), not as one lump sum.
You pay interest only on the money drawn so far. Repayments are usually interest only during the build.
You can usually borrow up to 80% of the land and build value without lenders mortgage insurance (LMI), or up to 90% to 95% with LMI.
Lenders need a fixed price building contract, council-approved plans and a licensed, insured builder.
Once the home is finished, the loan converts to a standard principal and interest home loan.
Table of Contents
- What Is a Construction Loan and How Does It Work?
- The 5 Stages of a Construction Loan
- How Is Interest Calculated on a Construction Loan?
- How Much Can You Borrow for a Construction Loan?
- What Documents Do Lenders Need?
- First Home Buyer Help When You Build
- Construction Loan Risks and How to Manage Them
- What Happens When Construction Is Complete?
- How to Apply for a Construction Loan
- Why Use a Nepali-Speaking Mortgage Broker for Your Build
- The Takeaway
- Frequently Asked Questions
What Is a Construction Loan and How Does It Work?
A construction loan is a home loan designed to fund building a home, a knockdown rebuild or a major renovation. Unlike a regular home loan, it releases the loan in stages rather than as a lump sum. The funds are released to your builder as each part of the building process is finished. These payments are known as progress payments, or drawdowns, and each one matches a milestone in your building contract.
Here is how construction loans work in practice:
Loan approval. To qualify for a construction loan, the lender assesses your income, expenses and credit history, then orders a valuation of the land plus the build. It works out the property value “as if complete”.
Land settlement. If you are buying land, the first part of the loan settles the land. If you already own land, its equity can count towards your deposit.
Your funds go first. Most lenders require you to pay your own contribution, such as the builder’s deposit, before the bank releases its funds.
Progress payments. Your builder sends an invoice at each stage. The lender often orders a progress inspection, then pays the builder directly.
Completion. Once construction is completed and the final payment is made, the loan converts to principal and interest repayments over the remaining loan term, usually up to 30 years.
The construction phase usually runs for 12 to 24 months, depending on the size of the construction project. Most lenders expect construction to start within a set time after approval, often about six months, and to finish within the interest-only construction period.
The 5 Stages of a Construction Loan
Most Australian building contracts split the build cost into a deposit and five progress payments. The exact percentages come from your contract, and some states cap them by law. The table shows a typical schedule.
| Stage | What is finished | Typical share of build cost |
|---|---|---|
| Deposit | Contract signed | Up to 5%, often paid from your own funds |
| 1. Base or slab | Site works, footings and concrete slab | 15% to 20% |
| 2. Frame | Wall and roof frames in place | 15% to 20% |
| 3. Lock-up | External walls, roof, windows and doors installed | 30% to 35% |
| 4. Fixing or fit-out | Plasterboard, cabinets, plumbing and electrical fit-off | About 20% |
| 5. Practical completion | Final inspection passed and keys handed over | 10% to 15% |
Each payment is released only when that construction stage is signed off. Before each payment is made, the lender may send a valuer to check the work matches the invoice. This protects you from paying for work that is not done and keeps the build on track. Allow about five to ten business days for each inspection and payment, and tell your builder so invoices are not delayed.
How Is Interest Calculated on a Construction Loan?
Interest is charged only on the funds drawn down so far, not on the full loan amount. During the build, most borrowers make interest-only repayments, which keeps costs lower while you may still be paying rent.
Here is a simple example for a $500,000 build loan at an illustrative rate of 6.00% p.a.:
After the slab stage, about $100,000 is drawn. Interest is roughly $500 a month.
After lock-up, about $350,000 is drawn. Interest rises to roughly $1,750 a month.
At completion, the full $500,000 is drawn. Interest-only repayments are about $2,500 a month, before the loan moves to principal and interest.
Many construction loans use a variable rate during the build. Construction loan rates are often similar to, or slightly higher than, standard home loan rates, and fees and charges apply for progress inspections and valuations. Interest rates for construction loans also vary between lenders, so compare loan options before you commit. With the RBA cash rate at 4.85% in November 2026, it pays to budget for higher repayments if rates rise mid-build. Use our loan repayment calculator and compare offers with our home loan rates comparison guide.
How Much Can You Borrow for a Construction Loan?
Your borrowing limit depends on two things: the lender’s loan to value ratio (LVR) and your borrowing power.
Up to 80% LVR. You avoid lenders mortgage insurance.
Up to 90% to 95% LVR. Many lenders will go higher with LMI, which adds to your costs.
Land equity counts. If you own the land outright, its value can act as your deposit.
Serviceability. Lenders test your repayments at about 3% above the actual rate, and check your debt to income ratio.
For example, if the land costs $300,000 and the build contract is $450,000, the total is $750,000. At 80% LVR, you could borrow up to $600,000 and need $150,000 from savings or equity. At 90% LVR with LMI, you could borrow up to $675,000. Check your numbers with our borrowing power calculator, then get a home loan pre-approval before you sign a land contract.
If you already own your current home or an investment property, you may be able to use the value of your property to fund a deposit for land or a build. Our guide to home equity loans explains how. Some buyers also use a family guarantee. See what is a guarantor loan.
What Documents Do Lenders Need?
A construction loan application needs more paperwork than a standard home loan. Expect to provide:
A signed fixed-price building contract with a licensed builder
Council-approved plans and specifications
The builder’s progress payment schedule
Home warranty insurance where your state requires it, such as Domestic Building Insurance in Victoria or the Home Building Compensation Fund in NSW
Quotes for any work outside the contract, such as driveways, fencing or landscaping
The land contract or title, plus income, ID and bank statements
Lenders require a fixed-price building contract because it gives certainty on the final cost. Cost-plus contracts and owner-builder projects are much harder to finance, and only a few lenders accept them.
First Home Buyer Help When You Build
Building a house often unlocks more government help than buying an established one:
First Home Owner Grant (FHOG). Most states and territories pay a grant for newly built homes. The amount and price cap differ by state, and the ACT does not offer one. See our NSW first home buyer grants guide.
5% Deposit Scheme. Eligible first home buyers can build with a 5% deposit and no LMI. For land and a separate build contract, the combined land price and build cost must sit under the location’s price cap.
Help to Buy. The government can take an equity share of up to 40% of the price of a new home for eligible buyers.
Stamp duty. With separate land and build contracts, stamp duty is generally paid on the land price only. Estimate it with our stamp duty calculator.
Read our first home buyer guide and the 2026 guide for Nepali migrants buying a first home for full eligibility rules.
Construction Loan Risks and How to Manage Them
Building a home from scratch carries risks that buying an established home does not. Plan for these before you sign:
Cost overruns. Variations and price rises are not covered unless the lender approves extra funds. Keep a buffer of about 10% to 15% of the build cost.
Delays. Weather, supply shortages or builder issues can stretch the build. You may pay rent and loan interest at the same time for longer.
Builder insolvency. Check the builder’s licence and make sure home warranty insurance is in place.
Valuation shortfall. If the completed home values lower than expected, you may need extra funds.
Tip: Ask your builder for a full list of inclusions and exclusions. Items like floor coverings, blinds and driveways are often left out of the contract but still need funding.
What Happens When Construction Is Complete?
When the house is built and reaches practical completion, you inspect the home with your builder, receive the occupancy certificate and the lender makes the final payment. Your construction loan then converts to principal and interest repayments. In effect it becomes your regular mortgage once construction is complete. Some lenders do this automatically, while others set up a new loan account with new loan terms.
This is also a smart time to review your loan. Rates may have moved during the build, and your new home may have a higher value. As a broker with access to 40+ lenders, Everest Home Loans can compare bank and broker options to see if a better rate or an offset account suits you.
How to Apply for a Construction Loan
The construction loan process is easier when you follow these steps in order:
Check your borrowing power and get pre-approval before you commit to land or a builder.
Choose your builder and sign a fixed-price building contract. Make sure all construction costs and exclusions are listed.
Submit your full application with the contract, plans, insurance and quotes for any work related to your construction.
Valuation and formal approval. The lender values the home as if complete and issues loan documents.
Settle the land and start building. Progress payments then follow each stage of home construction.
Everest Home Loans operates under the Australian Credit Licence of Connective Credit Services (ACL 389328). Read our credit guide before you apply.
Why Use a Nepali-Speaking Mortgage Broker for Your Build
Construction finance has more steps, more paperwork and more lender rules than a standard purchase. Rajesh Kandel has been broking since 2015 and has helped settle 1,500+ home loans worth $400M+. Everest Home Loans holds 450+ five-star Google reviews and Platinum Broker status with Commonwealth Bank, Westpac and NAB. We explain every stage in Nepali, Hindi or English, and we handle the lender paperwork for you.
We help Nepali and Hindi-speaking families build across Australia, including as a Nepali mortgage broker in Melbourne, Sydney, Brisbane, Perth, Adelaide and Canberra. Buying land in Queensland? Read our Brisbane land and home purchase guide. Learn more about our team on the Nepali mortgage broker in Australia page.
The Takeaway
Construction loans release money in stages, charge interest only on funds drawn and convert to a standard home loan once your home is built. Understand the progress payment schedule, your LVR, the documents lenders need and the grants you can claim, and keep a buffer for cost overruns. If you are planning to build, book a free consultation with Everest Home Loans to talk through your construction loan in your own language.
Frequently Asked Questions
How Long Does a Construction Loan Usually Last?
The construction period, when repayments are interest only, usually lasts 12 to 24 months. After that, the loan becomes a standard home loan over the remaining term, usually up to 30 years in total. Delays can extend the build, so ask your lender how long the construction period can run.
Can First Home Buyers Use a Government Grant With a Construction Loan?
Yes. First home buyers building a new home may qualify for the First Home Owner Grant in their state, the 5% Deposit Scheme and Help to Buy. In many states the grant is paid at the first progress payment, which can help cover your first home deposit. Rules and caps vary by state, so check your eligibility before you sign.
What If Construction Costs More Than Expected?
The lender will not release more than the approved amount without reassessing you. If costs rise, you may need to pay the difference from savings or apply for a loan increase. A 10% to 15% contingency buffer helps you avoid stress mid-build.
Do I Need a Licensed Builder to Get a Construction Loan?
Yes, in most cases. Lenders want a fixed price contract with a licensed builder and home warranty insurance where your state requires it. Owner-builder loans exist but are offered by very few lenders and usually need a larger deposit.
Can I Get a Construction Loan for an Investment Property?
Yes. Construction loans typically suit investors too. You can use one to build a rental property, and new builds can offer higher depreciation deductions. Lending rules and rates for investors differ, so read our investment property loans page.
How Much Deposit Do I Need for a Construction Loan?
Most lenders want at least 10% of the land and build value, or 20% to avoid LMI. Eligible first home buyers may build with 5% through the 5% Deposit Scheme. Our house deposit guide explains how to save it.
This article is general information only and does not consider your personal objectives, financial situation or needs. Lender policies, government schemes and interest rates change, so seek advice before acting.
