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Construction Home Loans

Written by

Shaun McGowan

If you want to build a home or residential investment property in Australia, chances are you’ll need a construction home loan. Construction home loans can also be used for major renovations in some cases.

In this guide to construction home loans you’ll learn about:

  • How construction loans work
  • Construction home loan progress payments
  • How to apply for a construction loan
  • Owner builder mortgages loans explained

How do construction home loans work?

Construction home loans are designed to fund the building of residential homes or investments. This is how they work:

  • Your builder provides the lender with a quote detailing the total cost for the project broken down into each stage of construction.
  • The lender will release funds as needed to complete each stage of the construction - this is called a ‘progressive drawdown’.
  • During the construction phase you’ll only pay interest on the amount you’ve drawn down.
  • You’ll only make interest payments during construction (not principal repayments).
  • When the build is finished your construction loan will revert to a normal home loan and you’ll start making both principal and interest repayments.
How a draw down works

Just like with a normal home loan it’s best to have a deposit equal to 20% of the build cost before applying. You may be approved with as little as 5% but you may have been charged extra fees such as LMI along with higher interest rates.

Learn more about interest-only home loans, and how home loan fees and repayments options work.

Australia's Money Matchmaker matching you with your best loans across multiple lenders
You can also purchase land to build on with a construction loan

How to apply for a construction home loan

When applying for a construction loan lenders will need all the usual documentation required when taking out a normal home loan, including:

  • Proof of identity
  • Proof of income
  • Proof of debt
  • Proof of savings, investments and assets
  • Record of spending
  • Gift letter (if part of your deposit has been given to you as a gift)
How to apply for a construction home loan

Other documents you'll need to provide

A building contract

When you engage a builder they’ll provide a contract that includes:

  • An outline of each construction stage
  • A progress payment schedule
  • A construction timeline
  • Total costs for the project

This document gives lenders an idea of when you will be drawing down on the loan, and when the project will be completed.

Building plans

This will also be provided by your builder or architect and will include all details of your home including layout, size, specifications, materials used and more.

On completion valuation

Before your construction loan is formally approved your lender will need an estimate of the home’s value on completion by a registered valuer. To do this the valuer will need both the building contract and the building plans.

They will estimate the value of the home on completion and compare it to recent sale prices of comparable homes in the area. This is done to ensure you’re not overspending on your build, and that your home will be worth more than the loan amount when completed.

Learn more about applying for a home loan.

Progress payments for construction home loans

Construction home loan progress payments are usually made in five key stages of the build. Here’s a rough breakdown of the total cost and duration of each stage:

  • Foundations - Laying foundations of the house and installing plumbing.
  • Frame - Building the frame of your property including roofing, windows, walls and trusses.
  • Lock up - Construction of internal walls, doors and insulation of the home. This includes everything that is required to be able to ‘lock up’ your property and make it weathertight.
  • Fit-out - The finer details of the home are added such as shelving, kitchen & bathroom cabinetry, tiles and internal cladding.
  • Completion - Everything that is required to complete the home. This may include installation of retaining walls or fences as well as cleaning of the site.
Construction home loans

Example of construction home loan progress payments

Construction stageDescription% of total costRough duration




14 days




Up to 30 days


Lock up


Up to 30 days




Up to 60 days




Up to 60 days

HomeBuilder scheme explained

The HomeBuilder scheme is a federal government initiative that awards a $25,000 tax-free grant for Australian citizens to build or substantially renovate their homes.

The grant must be used to build or renovate the recipient’s principal place of residence - it cannot be used for investment properties - Learn more about investment home loans.

Eligibility criteria and requirements HomeBuilder scheme

  • Recipients must be Australian citizens over the age of 18.
  • Recipient income for the previous financial year must be under: $125,000 for singles and $200,000 for couples.
  • Must enter contract between June 4 and December 31 2020 and work must start within three months of contract date.
  • Renovation work must be valued between $150,000 and $750,000.
  • Additions must prove accessibility, safety & liveability of the existing residence. That means additions like swimming pools and garden sheds can not be part of the renovations.
  • New builds can be valued up to $750,000 including land.
Home Builder Grant

Owner-builder construction loans

Usually to secure a construction loan you’ll need to sign a contract with a qualified builder. If you want to build your home yourself, you’ll need to apply for an owner builder construction loan, offered by a select few lenders.

Getting approval can be difficult for this type of loan because lenders view owner-builder projects as more risky, and more prone to cost overruns. If you’re a licensed builder you may be able to secure a loan for up to 80% of the build’s cost - if you’re not you may only be able to borrow 50-70%.

Because lenders are so strict with these types of loans, before you apply you should make sure:

  • You have a deposit of at least 20% if possible.
  • You have a good credit score and minimal debt.
  • You have a detailed plan for construction including cost estimates and quotations for tradesmen and materials.

Since not all lenders offer these types of loans it may be better to speak to a mortgage broker or financial advisor to help find the right fit.

Owner builder construction home loans


Construction home loans are loans specifically designed to fund the construction of residential homes and investments. Usually your lender will approve your loan up to a certain limit then allow you to draw down (withdraw) funds to cover building costs at each stage of construction.

To apply for a construction loan you’ll need:

  • A deposit of at least 5% but preferably more than 20%.
  • A cost-including building contract and building plans prepared by a registered builder.

Before your lender approves your construction loan a registered valuer will estimate the value of the home upon completion. Once your loan is approved you’re free to start construction!

Before you apply it’s a good idea to check if you’re eligible for the HomeBuilder scheme as you may be able to access a tax-free grant of up to $25,000.

Construction home loans FAQ

A construction loan is a home loan specifically designed to fund the construction of residential homes and investments.

Most major banks and lenders offer construction loans including:

  • Westpac
  • NAB
  • Commbank
  • ANZ
  • ING
  • CUA

Banks may have slightly more stringent restrictions and credit policies when assessing construction loans because they are considered higher risk than regular home loans. That’s because lenders:

  • Can not see the finished home when issuing the loan
  • There are risks that costs may overrun
  • The property may be worth less than the loan amount when completed.

Construction loans typically have a variable rate that is higher than market rates for normal home loans.

To secure a construction loan you must have:

  • A deposit equal to at least 5% of the total cost of the construction and land (but at least 20% is preferable). A contract from a registered builder including a quote for the total cost, a schedule for the build, and a cost breakdown for each stage of the build.
  • Building plans.

You’ll also need all the documents required to apply for a normal home loan including:

  • Proof of identity
  • Proof of income
  • Proof of debt
  • Proof of savings, investments and assets
  • Record of spending
  • Gift letter (if part of your deposit has been given to you as a gift)

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About the Author

Shaun McGowan from money.com.au



Shaun McGowan

Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.