How Construction Loans Work in Australia (2026 Guide)

How construction loans work in Australia: stages, progress payments and interest (2026)

A construction loan pays for a new home in stages instead of in one lump sum. Your lender releases a progress payment to the builder as each stage of the build is finished, and until the home is complete you usually pay interest only, and only on the money drawn so far, not on the full loan.

That’s the mechanism. What catches people out is the detail underneath it: how the builder’s payment schedule is tested, what a valuer does before each draw, why your interest bill starts well before the frame goes up, and what happens when the build runs late or over budget. We cover each one in the order you’ll meet it, with a worked example in dollars.

By Patrick O’Brien, Director and Home Loan Specialist since 2001. Updated 26 September 2026.

What is a construction loan?

A construction loan is a home loan built for a property that does not exist yet. On day one the lender’s security is a block of land, so instead of paying out the whole loan at settlement it pays the builder in instalments, each one matched to work that has actually been done. When the home is finished the loan rolls into an ordinary home loan with principal-and-interest repayments.

The same structure is commonly used for a knockdown-rebuild or a major renovation on a home you already own. At least one major bank’s construction policy covers renovations to an established property as well as new builds, which surprises most clients.

Is a construction loan better than a standard home loan?

For a new build with a licensed builder, usually yes, because you only pay interest on what has been spent and the lender checks each stage before it pays. The exception is when you already hold enough equity. Some borrowers release equity from another property as a single lump sum, park it in an offset account and pay the builder themselves. You lose the lender’s stage-by-stage inspection, which is a real check on the builder, but you gain control over payment timing. If you have strong equity, it is worth comparing both structures before you choose, especially on a renovation or a smaller build.

How progress payments work: the construction loan stages

Your building contract sets out the stages and what percentage of the contract price falls due at each one. The builder invoices at the end of each stage, you authorise the payment (by signing the invoice or the lender’s payment form), and the lender pays the builder directly once it is satisfied the stage is done. The money never passes through your account.

The split below is the typical shape of a fixed-price contract. Your builder’s schedule will differ, and the contract is what counts.

In NSW a builder can ask for no more than 10% of the contract price as a deposit before work starts. On a contract of $20,000 or more, the builder must also give you a home building compensation certificate before asking for any payment. Building Commission NSW also warns that an early or extra payment outside the contract’s stages may not be recoverable under home building compensation cover if the builder fails.

Your own money goes in first

If you are contributing cash to the build, some lenders expect you to spend it before they release their first draw. People assume the bank pays each invoice from day one. It doesn’t. Plan for your contribution to cover the first invoices, and budget for any fee the lender charges per draw. Those fees vary from lender to lender.

What the valuer checks before each payment

Before releasing a draw, the lender can send a valuer or inspector to confirm the stage the builder has claimed is actually complete. If the invoice says lock-up and the windows are not in, the payment waits. Our guide to how bank valuations work explains what a valuer is instructed to look at. It is a nuisance when it holds up the builder. It is also one of the few outside checks most home buyers get on whether the work matches the invoice.

The final progress payment

The completion payment is the one that needs the most paperwork. Before releasing it, lenders typically ask for a building insurance certificate of currency on the finished home and, where your state requires one, the occupation certificate. Organise insurance early. It quietly becomes a blocker, and almost everyone leaves it too late: the lender will not release the final payment until it has seen the certificate of currency.

Do a thorough handover inspection before you sign off the final invoice. Once that payment is made, you have lost your last piece of leverage over the builder. In NSW the Home Building Act 1989 gives you six years to act on major defects and two years for other defects, measured from completion.

Our director has built more than once himself, including a duplex. On one build a front wall went over the council boundary; by the time he pursued it the builder was in administration, and the warranty insurer classed it as a minor rather than major defect with the claim window already closed. Know those periods before you need them.

Do you pay the mortgage while the house is being built?

Yes, but usually only interest, and only on what has been drawn. During construction your repayment each month is roughly the drawn balance multiplied by your interest rate, divided by twelve. Once the home is complete the loan switches to principal and interest on the full balance and the repayment steps up again.

The part most budgets miss is the land. If the land settled on the same loan, you are paying interest on the land from the day it settles, before a single stage is invoiced.

Worked example: land plus a fixed-price build

Say you buy land for $500,000, put $110,000 of your own money into the land purchase, and sign a $600,000 fixed-price building contract. The loan is $990,000 in total: $390,000 drawn when the land settles, and $600,000 released to the builder in stages. If the completed home values at $1.1 million, that is a 90% loan-to-value ratio (LVR), so lenders mortgage insurance applies (this ignores stamp duty and purchase costs, which come on top, and any LMI premium added to the loan, which would lift it slightly). Here the builder’s deposit is drawn from the loan; many buyers pay it from savings instead.

Before the builder has started you are already paying about 40% of the monthly interest you will pay once the loan is fully drawn, and more than half by the time the slab is down. If you are also paying rent while you build, that overlap is the real cash-flow squeeze. Run your own numbers through our loan repayment calculator using the drawn balance at each stage.

Interest-only during the build, then principal and interest

Most construction loans run interest-only for the build period and then convert automatically. Lenders set the length of that period differently. Ask how long the interest-only period runs and whether the lender adds a loading for interest-only repayments, because a loading on an 18-month build adds up.

An offset account is worth asking about too, because offset rules during construction differ between lenders.

We don’t publish rates in our guides, because construction pricing depends on the lender, your LVR and how the loan is structured, and it moves often. The costs sit in different places. At least one lender we use charges no progress-claim fees and allows a full offset during the build, while another charges a construction administration fee. So compare the whole cost (our fixed vs variable guide covers the rate choice at rollover): the rate, any interest-only loading, fees per progress draw, and whether you can use an offset while you build. Once the home is finished and the loan has rolled over, you can refinance it like any other home loan. Wait until then. A valuation on a half-built home rarely helps.

The fixed-price contract and the cost-to-complete test

Lenders want a fixed-price building contract from a licensed builder, because it tells them the total cost before they commit. A handful of lenders on our panel, seven at last count, will consider a cost-plus contract, but most require a lower LVR, typically 65 to 70%, and lenders mortgage insurance is generally not available. One accepts cost-plus at its standard construction LVRs. Two tests then decide how much they will lend.

The first is the on-completion valuation. A valuer reads the plans, specifications and contract and estimates what the finished home will be worth. The lender lends against that figure, and where it is lower than what you are spending, the lower number wins. If land plus build costs $1.1 million and the valuer says the finished home is worth $1.05 million, the $50,000 gap comes out of your pocket or the loan shrinks.

The second is cost to complete. At every stage the lender checks that the undrawn loan, plus any money you have committed, is enough to finish the house. That is why variations matter so much. If you add a $30,000 kitchen upgrade halfway through, the lender won’t simply add it to the loan. Expect to fund it yourself, usually before the next draw. One major bank no longer accepts a letter where a borrower’s contribution falls short on a construction loan; it wants receipts or other proof of payment to the builder.

The payment schedule is reviewed too

We have seen this snag more times than we can count, and it catches clients off guard because nothing about their contract looked unusual. Besides valuing the home, the valuer reviews the builder’s progress payment schedule against what is standard for the trade. If the schedule is front-loaded, with too much of the price due by slab or frame, the valuation report sets out an alternative schedule and the lender will not proceed until the contract is amended to match it. That means going back to the builder after signing.

The lender is protecting you here as much as itself. A builder holding 60% of the price at frame stage has less reason to finish the other 40%, and if the builder fails, the undrawn funds may not cover the rest. Some lenders are flexible within limits. One lender we use, for example, caps the deposit plus base stage at 20% of the fixed-price contract and requires the final stage to be at least 10%. That is why we ask to see the payment schedule at the outset, ideally before the contract is signed.

Licensed builder or owner-builder?

Most construction lending assumes a licensed builder on a fixed-price contract, with home building compensation cover in place.

Owner-builder lending is a smaller market. Only a handful of lenders on our panel, six at last count, accept owner-builders. Most stop at 60% LVR, one goes to 80% of the land value where a registered builder is involved, and lenders mortgage insurance is generally not available, so you fund far more of the build yourself.

In NSW you need an owner-builder permit to do or supervise work over $10,000 on your own home when the work needs development consent or is complying development and no licensed builder is contracted to supervise it. Work over $20,000 also requires set units of competency or equivalent qualifications and experience, and only one permit can be issued in any five-year period unless it relates to the same land or special circumstances apply. The permit is not a builder’s licence: licensed trades still do the electrical and plumbing work, and you carry the same responsibility for the building work as a licensed builder.

That changes the risk a lender sees. There is no fixed-price contract, no builder’s compensation cover on your own work, and nobody professional running the site. Be ready for questions about your building experience, and hold a bigger contingency.

House-and-land packages: one loan or two contracts

A house-and-land package can be one contract or two, but it is typically a contract of sale for the land and a separate building contract for the home, with the land and the build coming from the same party or related companies. It can be financed on one construction loan or on two separate loans.

On most files a single land-and-construction loan assesses better. If you buy the land on its own loan first and arrange the construction loan later, you are paying a mortgage and rent at the same time, and the lender counts that rent as an expense, which cuts your borrowing capacity. Under one combined facility the rent drops out of the assessment, because the lender knows you will live in the finished home. It only works if the builder offers a combined package. That is the first question we ask. Our guide to house-and-land package finance in NSW covers the package side in more detail.

Where the deposit goes matters too. Putting the whole deposit against the land, keeping back only the builder’s deposit, creates equity in the land. Because the lender lends against the valuer’s on-completion figure, that equity can carry the build without a second deposit.

Unregistered land is the other trap. On a new estate the land title may not register for months. Nothing settles until it does, and a construction loan approval can lapse in the meantime. Construction pre-approvals typically run 90 days, so line up the builder’s paperwork before you apply. See getting a mortgage on recently registered land.

Sequencing can also rescue a file. On one where a low credit score was blocking the lenders with the most capacity, the answer was to buy the land first on a smaller loan, let the score recover, and apply for the construction loan twelve months later. Either way, check your borrowing capacity against the full loan, not just the land.

Can you use the 5% Deposit Scheme to build a home?

Yes. The Australian Government 5% Deposit Scheme covers a house-and-land package and vacant land with a separate contract to build, as well as existing homes and off-the-plan purchases. Eligible first home buyers need a minimum 5% deposit (2% for eligible single parents and legal guardians) and pay no lenders mortgage insurance.

The new-build rules are strict and the Scheme’s information guide says the timeframes cannot be changed. Your lender will require you to:

1. sign an eligible building contract within 6 months of the home loan settling
2. start building within 12 months of settlement
3. finish building within 36 months of settlement
4. move in within 6 months of the occupancy certificate being issued

The building contract must be with a licensed and registered builder, carry the required building insurances, be at arm’s length and specify a fixed price, so owner-builder contracts are not eligible. If you already own the vacant land before securing a Scheme place, a new loan to build on it is not eligible either. And where you are buying land, it must be titled before the guarantee can be issued, within your 90-day pre-approval period, which rules out many unregistered estate lots.

Price caps apply to the whole project. For vacant land with a separate building contract, the land price plus the build cost must stay under the cap for the location. In NSW the cap is $1.5 million in Sydney and the regional centres and $800,000 elsewhere, and the government’s property price cap tool shows the cap for a given postcode, as a guide your lender then confirms. The loan can run up to 30 years plus up to three years for the build, which may include interest-only repayments.

Two cautions from the Scheme’s own guide. It does not protect you if costs rise or the finished home values lower than expected: you fund the shortfall, and it can affect your eligibility. And while you can take one loan for land and build or a separate loan for the build, not every participating lender offers the second option. Check retained-savings limits (how much you can keep in savings after settlement) with your broker, because lenders apply them differently. Our 5% Deposit Scheme guide for NSW has the full eligibility picture.

NSW first home buyers building new can also look at two state concessions. The $10,000 First Home Owner (New Homes) Grant applies where the land value plus the building contract and variations is $750,000 or less, and owner-builders can qualify. The First Home Buyers Assistance Scheme exempts vacant land valued up to $350,000 from transfer duty and gives a concessional rate below $450,000. Transfer duty figures are based on thresholds for contracts exchanged on or after 1 July 2023, sourced from Revenue NSW.

How much deposit do you need for a construction loan?

The deposit is measured against the whole project: land plus build, tested against the valuer’s on-completion figure. Borrow more than 80% of that value and lenders mortgage insurance applies, as it does on any home loan. Our guide to how much deposit you need for a house covers the rest, and a guarantor home loan can stand in for part of it. Our LMI guide explains how the premium is worked out.

How high a lender will go on a construction loan varies more than on a standard purchase. Around 26 lenders on our panel write residential construction loans. About nine go to 95% LVR including capitalised LMI, about ten stop at 90%, and the rest sit at 80% or below. A couple of lenders cap construction well below their normal purchase limit, one at 80% and one at 70%, so the lender that suits your purchase may not suit your build. A number of lenders don’t write construction loans at all, which is why the lender choice starts before the land contract. One non-bank we use lends up to 95% for full-doc borrowers and 85% for alt-doc borrowers (self-employed borrowers who verify income without full tax returns). At least four lenders on our panel extend their professional LMI waiver (doctors and other listed professions) to construction loans, up to 90% LVR, and we have placed those files. A couple of lenders explicitly exclude construction from their waiver, so check before you rely on one. See our LMI waivers page.

If you already own the land, the equity in it counts toward the deposit. On a knockdown-rebuild, the equity in the property, most of it in the land once the old house comes down, usually does the same job. Keep a contingency on top of the deposit for variations and site costs, because lenders generally won’t fund them for you.

How long does a construction loan take, and what if the build runs late?

A construction approval has more to assess than a standard purchase: the contract, plans, specifications, the builder’s insurances and an on-completion valuation. Service times move constantly, and a construction file can take twice as long at one lender as another in the same month, so we check current turnaround before we choose where to lodge. We have seen a construction file where electronic signatures were rejected on the loan documents, so allow time for wet signing.

Lenders also differ on whether they will give formal approval before the building contract is signed. Two lenders on our panel will give formal approval on a draft or unsigned building contract and hold only the first progress draw until it is signed, which removes the sign-first-or-approve-first dilemma.

Self-employed borrowers should also expect questions about income. We have had a construction assessor ask for a written explanation where a self-employed borrower’s latest-year income was more than 10% above the year before, so have that explanation ready before you lodge.

The build itself runs against two clocks. The first is your lender’s construction window, the period after which undrawn funds may no longer be available. At most lenders that is 12 months from the first progress draw; the major banks allow 24 months. The first draw itself usually has to happen within three to six months of settlement. Extensions are considered case by case when council or builder delays push the build out, and none is automatic. The second, if you are using the 5% Deposit Scheme, is the 36-month finish deadline above.

When a build runs over, three things happen at once. You keep paying interest on the drawn balance, often on top of rent. You may need the lender to approve an extension of the construction period. And if the delay comes with higher costs, the cost-to-complete test applies again. Building Commission NSW’s guidance on home building delays covers what to do about delays, price increases and disputes, and home building compensation cover is the last resort if the builder cannot finish.

One recent warning: we have been told that some private lenders are tightening funding for construction loans. If a private lender is funding your build, confirm that funding line is secure before the next stage is due.

If you are ready to compare options for your build, our construction home loans page explains how we arrange construction finance across 52+ lenders.

Frequently asked questions

How does a construction loan work in Australia?

A construction loan pays your builder in stages instead of one lump sum. After each stage (typically base, frame, lock-up, fixing and completion) the builder invoices, you authorise it, and the lender pays the builder once the stage is confirmed. You pay interest only on the amount drawn, and when the home is finished the loan becomes a standard principal-and-interest home loan.

How much deposit do you need for a construction loan in Australia?

It depends on the lender and your situation. The deposit is measured against the land plus the build, tested against the valuer’s on-completion value. Borrowing above 80% of that value means lenders mortgage insurance applies, and maximum LVRs on construction vary between lenders. Eligible first home buyers can build with a 5% deposit and no LMI under the Australian Government 5% Deposit Scheme.

Do you pay the mortgage while your house is being built?

Yes, but usually interest only, and only on the money drawn so far. If the land settled on the same loan, you pay interest on the land from settlement. Repayments rise as each progress payment is released, then switch to principal and interest on the full balance once the home is complete.

When is the final progress payment made?

At practical completion, after the builder finishes the work and the final invoice is issued. Before releasing it, lenders typically need a building insurance certificate of currency and, where your state requires one, an occupation certificate. Inspect the home thoroughly before you authorise the final payment.

Which is better, a home loan or a construction loan?

For a new build with a licensed builder, a construction loan usually costs less during the build because you only pay interest on what has been drawn, and the lender checks each stage before paying. Borrowers with strong equity sometimes use a standard loan or equity release instead, which gives more control over payments but removes the lender’s stage inspections.

Can I get a construction loan as an owner-builder?

Yes, but only a handful of lenders on our panel, six at last count, accept owner-builders. Most stop at 60% LVR, and lenders mortgage insurance is generally not available, so you fund far more of the build yourself. In NSW you also need an owner-builder permit for work over $10,000 that needs development consent or a complying development certificate, and work over $20,000 requires set units of competency or equivalent qualifications.

Can you use the 5% Deposit Scheme to build a home?

Yes. The Scheme covers house-and-land packages and vacant land with a separate building contract. You must sign the building contract within 6 months of loan settlement, start building within 12 months, finish within 36 months, and move in within 6 months of the occupancy certificate. The land and build together must stay under the price cap for the location.

Talk to a broker before you sign the building contract

The easiest time to fix a construction loan problem is before the building contract is signed. We review the progress payment schedule, check that the builder and contract meet lender rules, and choose a lender whose construction process fits your build. If you do only one thing, send us the builder’s payment schedule before you sign. Mortgage World Australia has arranged construction finance since 2001, and we compare 52+ lenders. Talk to us about your construction loan.

This article contains general information only and does not constitute financial advice. Your personal financial situation, objectives and needs have not been considered. Before acting on any information, you should consider its appropriateness to your circumstances. Speak to a qualified mortgage broker for advice tailored to your situation. Mortgage World Australia Pty Ltd ATF O’Brien Family Trust (ABN 65 653 284 433) is a credit representative (CR No. 396946) of Mortgage Specialists Pty Ltd (ACN 612 422 178, Australian Credit Licence No. 387025).

Patrick O'Brien

Patrick is a Director and a Home Loan Specialist. He has been helping Australians with home loans since 2001. Prior to working as a mortgage broker Patrick was employed by Macquarie Bank for 3 years and also worked as an accountant for a publicly listed company. Patrick’s qualifications include:

Bachelor of Business, UTS Sydney. Majored in accounting and sub-majored in Finance and Marketing.
Diploma of Finance and Mortgage Broking Management FNS50310
Certificate IV in Financial Services (Finance/Mortgage Broking) FNS40804