Key takeaways
- Construction loans release funds in stages (progressive drawdowns) as the build hits milestones.
- You usually pay interest only on the amount drawn, so repayments grow through the build.
- A fixed-price contract with a licensed builder makes approval smoother.
- On completion, the loan typically converts to a standard principal-and-interest mortgage.
Buying an existing home is one payment at settlement. Building one is a series of payments as walls go up — and your loan has to match that rhythm. Construction loans are designed for exactly this, releasing money in stages and charging interest only on what’s been used. Understanding the structure keeps a build’s finances calm instead of chaotic.
Progressive drawdowns
Instead of handing over the whole amount up front, a construction loan pays your builder in stages as each phase completes. The typical milestones are:
- Deposit / slab — the foundation is laid.
- Frame — the skeleton of the house.
- Lock-up — walls, windows and roof enclosed.
- Fit-out — internal fixtures and finishes.
- Completion — final works and handover.
You draw down — and are charged interest — only as each stage is funded.
Interest during the build
Because interest applies only to the drawn amount, repayments start small and grow as the build progresses. Most construction loans are interest-only during construction, which helps if you’re paying rent at the same time. On completion, the loan usually converts to a normal principal-and-interest mortgage.
Illustrative example. Early in a build, with only the slab stage drawn, interest is charged on a small fraction of the total loan — so repayments are modest. By lock-up and completion, more is drawn and repayments step up. Planning for that rising cost through the build avoids surprises. Actual figures depend on your loan and drawdown schedule.
Lenders scrutinise the building contract closely — a fixed-price contract with a licensed builder is far easier to finance than an open-ended arrangement. They assess your LVR against the total land-plus-build cost, so the usual deposit and LMI rules apply.
What to watch for
Build in a contingency for variations and delays, confirm your lender’s drawdown process with your builder, and remember valuations are done “on completion” against the finished home. It’s also worth checking any first-home benefits — the First Home Owner Grant often favours new builds. Get your finance and contract aligned before you commit.
Broker Insight. The builds that finance smoothly almost always have a fixed-price contract with a licensed builder. Open-ended arrangements are where lenders get nervous and delays creep in.
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Book your free game plan callFrequently asked questions
How does a construction loan work?
A construction loan releases funds in stages — called progressive drawdowns — as each phase of the build is completed, rather than all at once. Typical stages are the deposit/slab, frame, lock-up, fit-out and completion. You’re usually charged interest only on the amount drawn so far, so repayments start small and grow as the build progresses. Once the home is finished, the loan generally converts to a standard home loan.
Do I pay interest during construction?
Yes, but only on the funds drawn down at each stage, and most construction loans are interest-only during the build. That keeps repayments lower while you’re often also paying rent elsewhere. When construction finishes, the loan typically switches to principal-and-interest as a normal mortgage. Budgeting for these growing interest-only repayments through the build is an important part of planning.
What deposit do I need for a construction loan?
Similar principles to a standard loan apply — lenders assess the total cost (land plus build) and your loan-to-value ratio against it, so a deposit of around 20% avoids LMI, and lower deposits are possible with LMI. Lenders also scrutinise the fixed-price building contract and may hold back until certain conditions are met. A fixed-price contract with a licensed builder makes approval smoother.
This guide is general information only and does not take your personal circumstances into account. It is not financial or credit advice. Government schemes, lender policies, rates and tax rules change over time and eligibility criteria apply. Speak with us for advice tailored to your situation.