If you’re planning to build your dream home, the financing process works a little differently than buying an established property. A traditional home loan won’t cover staged building costs, which is where a construction loan comes in.

What is a Construction Loan?

A construction home loan is designed specifically for people building a property rather than purchasing one that already exists. Unlike a standard mortgage, where the full loan amount is drawn down upfront, construction loans release funds in stages as the build progresses.

This staged payment system ensures you only pay interest and repayments on the funds you’ve actually used, not the full loan amount from day one.

The Typical Stages of a Construction Loan

While each lender’s structure may vary, most construction loans are based on five key stages of building:

1. Foundation stage – covering site preparation, levelling, plumbing groundwork and waterproofing.

2. Frame stage – including structural framework, brickwork, roofing and window installation.

3. Lock-up stage – when external walls, windows and doors are completed, allowing the property to be “locked up.”

4. Fit-out stage – interior work such as plastering, cabinetry, benches, plumbing, electrical wiring, fixtures and fittings.

5. Completion stage – the final release of funds, typically covering finishing touches, contracted works, equipment, utilities and professional cleaning.

At each stage, your builder provides an invoice that is paid using loan funds, and repayments increase gradually as more funds are drawn.

How Loan Amounts Are Calculated

The amount you can borrow with a construction loan is partly based on the projected end value of the completed property. This means lenders will often require detailed building plans, cost estimates and a signed building contract before approval.

Construction Loan vs Standard Home Loan

It is technically possible to use a standard home loan to fund construction. However, the drawback is that you’ll start paying interest and repayments on the entire loan amount immediately, even if the build has only just begun. With a construction loan, you avoid paying for funds you haven’t yet accessed.

Is a Construction Loan Right for You?

If you’re considering building your home from scratch, a construction loan can be a flexible and cost-effective option. That said, construction loans differ significantly from standard mortgages, and the approval process can be more complex. Speaking with a mortgage broker or financial adviser can help you understand which option is best suited to your goals and circumstances.

Disclaimer
This blog post is provided as general information only and does not constitute financial or legal advice. Construction loans vary widely between lenders, and eligibility depends on individual circumstances, building plans and contract terms. Always seek professional advice from a licensed mortgage broker or financial adviser before making borrowing decisions.