If you’re planning to build your own home, a construction loan could help finance your project. Unlike standard home loans, construction loans provide funds progressively in stages as your new home is built. Here are a few of the key points you should consider.
A quick guide to construction loans
Construction loans differ significantly from traditional home loans, which typically pay a lump sum upfront to purchase an existing property. Instead, your lender releases funds in stages, known as “progress payments,” aligning with specific phases of construction.
Common stages of construction include:
- Base or slab stage
Covers site preparation, including excavation, plumbing, and laying the concrete slab foundations that will support your home.
- Frame stage
Construction of your home’s frame, including structural beams, roof trusses, and internal and external walls, clearly outlining your home’s layout.
- Lock-up stage
Your home is now secure and weatherproof, including the installation of external walls, windows, doors, roofing, guttering, and external cladding, making the property secure and lockable.
- Fit-out stage
Installation of internal fittings and fixtures such as plasterboard, internal doors, cabinetry, kitchen and bathroom fittings, electrical wiring, plumbing, tiling, and other interior elements.
- Completion stage
Final touches, including painting, flooring, appliances, final plumbing and electrical connections, and external work like landscaping, driveways, or fencing. Once completed, your home is inspected and prepared for occupancy.
Disclaimer: The stages outlined above are for general information purposes only and may differ from builder to builder. Construction contracts can vary significantly, and specific stages may differ in name, order, or scope. Always refer to your individual builder’s contract for accurate details and consult a qualified professional for advice tailored to your situation.
At each stage, your lender will finance the construction after inspecting the completed work. This ensures funds are appropriately used and the project remains within the agreed budget and timeline.
Construction loans are usually structured as interest-only loans during the building period. Once construction is complete, the loan typically reverts to principal and interest repayments. Each payment is released only after the completion of the specified building stage, confirmed by inspections to ensure quality and adherence to agreed plans.
Applying for a construction loan: What you need to know
Applying for a construction loan is similar to applying for a standard home loan but with some additional documentation specific to the building project.
You’ll generally need:
1. Standard loan documents
These help your lender assess your financial situation and borrowing capacity:
- Identification documents
- Proof of income (e.g. payslips, tax returns)
- Details of assets and liabilities (e.g. savings, credit cards, existing loans)
2. Construction-specific documents
These are typically provided by your builder or obtained during the planning stage:
- Signed fixed-price building contract with a licensed builder
- Contract of sale for the land (if applicable)
- Council-approved plans and specifications
- Quantity surveyor report (if required by lender)
- Evidence of builders insurance and relevant permits
3. Documents required during construction
To access progress payments from your lender, you may need to provide:
- Signed progress payment invoices from the builder
- Receipts for out-of-contract items or variations
Keep in mind: Each lender has different policies and documentation requirements depending on the nature of your build and your personal circumstances. It’s important to clarify what’s needed early in the process. As your mortgage broker, I can help you understand what to expect and support you every step of the way.
What else do I need to consider?
Before you commence your build, it’s important to be clear on exactly what’s included in your building contract. There could be additional expenses you’ll need to budget for, such as landscaping, fencing, appliances, or upgrades.
It’s a good idea to set aside a contingency fund for unexpected costs that may not be covered by your construction loan.
Unlike purchasing an existing home, building from scratch takes time and may face delays from weather, labour shortages, or material availability. It’s a good idea to approach your build with realistic expectations about timelines and completion.
If you’re building in a new estate, be aware that local amenities such as shops, schools or parks may still be under development when you move in.
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