For most families, building a new home is the largest financial commitment they’ll ever make. Understanding how construction finance works — and how it differs from a standard home loan — is essential before you sign a building contract. Getting the finance structure right from the start can save you thousands in interest and prevent cash flow problems during the build.
How a Construction Loan Differs From a Standard Home Loan
A standard home loan releases the full purchase price to the vendor at settlement. A construction loan works differently: rather than releasing funds all at once, it releases money in stages — called progress payments or drawdowns — that align with key milestones in the construction process. This means you’re only borrowing (and paying interest on) the amount that has actually been drawn down at any point during the build, rather than the full loan amount from day one.
This structure makes genuine financial sense: why pay interest on $700,000 when only $150,000 worth of work has been completed? During the construction period, most lenders charge interest-only repayments on the drawn-down amount, which keeps your cash flow manageable while the build is underway.
The Standard Progress Payment Schedule
In NSW, the HIA (Housing Industry Association) standard building contract specifies a typical progress payment schedule for new home builds. While this can vary, a common structure is: deposit on contract signing (typically 5%), slab stage (typically 15–20%), frame stage (typically 15–20%), lock-up stage (typically 20%), fixing stage (typically 15–20%), and practical completion (balance). Your lender will send a valuer to inspect the property at each stage before releasing the next drawdown. This protects both you and the lender by ensuring funds are only released for work that has actually been completed to the required standard.
Land and Construction: Two Separate Settlements
If you’re buying land and building (rather than doing a knockdown rebuild on a block you already own), your finance involves two separate transactions. First, you settle on the land — this is funded like a standard property purchase. Second, you draw down the construction loan in progress payments as the build proceeds. Some lenders offer a combined land and construction loan product that handles both in a single facility; others require separate products. Your mortgage broker can help you structure this in the most efficient way for your situation.
How Much Can You Borrow?
Lenders assess construction loan applications based on the “on-completion” value of the property — what the land plus completed home will be worth when the build finishes. This is determined by an independent valuation using the plans and specifications. Most lenders will lend up to 80% of the on-completion value without requiring lenders mortgage insurance (LMI), or up to 90–95% with LMI. It’s important to note that some lenders cap construction loans at a lower LVR (loan-to-value ratio) than standard home loans, so discussing this with a broker early is important.
Choosing the Right Lender for a Construction Loan
Not all lenders are equally experienced with construction finance. Some of the key things to look for in a construction loan include: progress payment flexibility (can they accommodate your builder’s payment schedule?), interest-only period during construction, competitive interest rate from day one rather than reverting to a higher rate post-construction, and a valuation process that is fair and doesn’t undervalue well-designed custom homes.
Working with a mortgage broker who specialises in construction finance — rather than a lender’s in-house banker — often produces significantly better outcomes. An experienced broker will know which lenders handle construction loans efficiently and can navigate the process on your behalf.
Common Pitfalls to Avoid
A few mistakes trip up new home builders more than others. Underestimating the total project cost is the most common: make sure your borrowing capacity covers not just the base build but also site costs, landscaping, council fees, and a contingency buffer of 10%. Getting finance pre-approval before signing a building contract is essential — don’t assume you’ll be approved. And understanding exactly what happens if your build goes over time or over budget will help you plan for scenarios you hope won’t happen but need to be prepared for.
At Ozzie Dream Homes, we work closely with clients and their finance brokers to ensure the construction loan process is smooth and well-coordinated with the build timeline. We’re happy to connect you with experienced construction finance brokers who understand how new home builds work. Talk to our team to find out more.
