The Ultimate Guide to Construction Loans in Australia

Are you looking to build your dream home or undertake a major renovation project? If so, then a construction loan could be the answer.

Navigating the world of construction loans can be overwhelming and confusing. That’s why we’ve put together this ultimate guide to construction loans for what you need to know before taking the plunge!

What is a construction loan? How does it work? These are the questions we’ll discuss. We’ll also cover what to expect when you apply for a construction loan in Australia.

Introduction to Construction Loans

Construction loans are a type of loan used to finance the construction of a home or investment property. Construction loans are typically interest-only repayments. Interest Only means that only the interest portion is paid back during construction.

The length of construction periods can vary depending on the project but typically range from six months to one year. Once construction is finished, your loan will change to a principal and interest loan unless other arrangements have already been agreed upon before the property is completed.

The biggest downside of a construction loan is that they tend to have higher interest rates than traditional mortgages. This is because lenders see them as being more risky than regular mortgages. As such, comparing different loans is important and ensuring you get the best deal possible before committing to one.

How Does a Construction Loan Work in Australia?

A construction loan is a type of home loan. It provides the funds to build a new property or renovate an existing one.

In Australia, this type of loan operates differently from traditional home loans. Rather than receiving the entire loan amount upfront, borrowers receive payments in stages as construction progresses. These stages are called “drawdowns”. They are often linked to milestones, such as laying a slab or getting the property to the lockup stage.

A third-party valuer will visit the site during each drawdown. They will ensure that progress meets expectations. Only then will further funds be released to the builder. This process continues until construction is complete and the borrower can transition to a standard mortgage product.

Before approving the construction loan, borrowers should remember that lenders may ask for additional documents like building contracts, plans, and permits. This is an important step to keep in mind.

Progress Payments and Drawdowns

Construction loans are usually paid out in progressive drawdown payments as the work on the project progresses. The lender will pay the builder in instalments as construction progresses. This differs from receiving a single large payment at the end.

Drawdowns refer to the release of funds from the loan amount that has been approved. The loan drawdown process consists of five stages. At the end of each stage, the builder will invoice the lender.

The lender will then send a third-party valuer to the property to check that the works are finished. Once the invoice is paid, the builder will move on to the next stage of the building contract.

The 5 Stages of a Construction Loan in Australia

Construction loans in Australia usually have five stages:

  1. This is the first stage of the loan process: pre-approval. During this phase, you must provide the lender with evidence of your income, employment, and assets.
  2. Loan application: Once pre-approved, you can formally apply for the construction loan. At this stage, you’ll need to provide detailed information about your proposed construction project, including plans, budgets, and timelines.
  3. Loan approval: Your loan application will be approved if successful. The lender will then allow you to draw down funds for the various stages of construction.
  4. Construction period: This is when you’ll carry out the construction work on your project. The lender will typically require progress reports and inspections during this time to ensure that everything is on track.
  5. Loan repayment: Once construction is complete, you must start repaying your loan plus interest according to the agreed terms. Construction loans typically have lower repayment terms than regular home loans, so you’ll need to be prepared for higher repayments.


Pre-approval is one of the most important steps in applying for any home loan. The first thing you need to do is gather up your financial information. This includes your income, debts, and assets.

Your mortgage broker will use this information to decide how much you can lend. They will also determine what interest rate you can be offered.

It is a great way to search for the best home loan option. Comparing different offers can help you save money. You need to know a few things before starting the pre-approval process.

Next, you’ll need to find a property you want to purchase. Provide your mortgage broker with information about the property you are considering. This includes the type of property, the size, and the estimated purchase price.

Loan Approval and Drawdown

Once your mortgage broker submits your home loan to the lender, the lender’s assessment team will receive the application. The lender will review the notes and details from your broker. They will determine if you can afford the loan.

A full valuation of the completed property is needed, especially with a construction loan. This confirms that all items and inclusions specified in the contract are satisfied.

The lender will formally approve the application if affordability and a satisfactory valuation have been verified. They will then send an agreement to the applicant to sign. This agreement outlines the loan terms that the applicant must agree to. This will enable the building process to start.

Building commences

We can begin building our new home after the approval process and the loan have been settled.

Construction loans typically involve five stages. The number of stages may vary depending on the type of property and its value, but traditional homes normally have five stages.

The five stages are as follows;

1. Slab

This is where the foundation of the house is completed. Most new homes are constructed on concrete slabs. However, some are still built on stumps.

High-rise apartments are a different type of construction and require an off-the-plan purchase loan. These loans are treated differently from construction loans. This will be identified in the building contract.

2. Frame

The walls and roof of the property are erected to create a home. The material used for this stage is generally wood or metal.

3. Lockup

Once the home’s external walls, windows, and roof are completed, the property moves to the lockup stage.

4. Fixtures and Fittings

The property is starting to take shape. Internal walls and rooms are being built. Tiling, showers, bathtubs, appliances, and other items are being installed. This is the final stage before completion.

5. Final Payment & Completion of Work

All works have been completed on the property and the project is now finished. It is time to make the final payment to the builder and take over ownership of the property.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

Mortgage Broker in Melbourne

Christopher Berry | Owner and Director of Find A Better Rate Home Loans

Christopher Berry is the owner of Find A Better Rate Home Loans which was establish in July 2015. Christopher has been a Mortgage Broker for the past 17 years and has arranged finance for all types of applicants from first home buyers to complex company and trust lending. Christopher has customers located all over Australia and can assist with all of your finance requirements. Christopher can be contacted on 0477 212 840 or email