Construction Loan:

A Comprehensive Guide for Successful Projects

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Construction Loan: A Comprehensive Guide for Successful Projects

A construction loan is a type of home loan designed specifically for anyone looking to build or significantly renovate a property.

Unlike traditional home loans which are drawn down in one stage at settlement, construction loans are structured to release funds in stages as your project progresses, ensuring that you only pay for work that has been completed.

During the building process, you typically only pay interest on the amount drawn down at each stage, so you are only paying interest on funds that you have used, this usually results in lower repayments while your project is underway.

As a borrower, it’s essential to understand the intricacies of construction loans and how they may differ from standard home loans.

A construction loan usually involves a designated timeline for the commencement and completion of the project, often within 12 to 24 months, and requires progress payments made to the builder or contractor based on milestones outlined in the fixed price building contract.

Regular inspections or progress valuations take place throughout the build by the lender to confirm that work is completed according to specifications.

Key Takeaways

  • Construction loans are designed for building a new home or major renovation to an existing home, and with funds being released in drawdown stages, usually 5 to 6 stages.
  • Borrowers typically pay interest only on the amount drawn down during the construction period, i.e. on the amount used.
  • Construction loans usually include milestone-based progress payments and inspections to ensure the project stays on track.

Borrower’s Guide to Vacant Land and Construction Funding

Vacant land

If you are seeking to finance the construction of your new home or investment property, you would either need to fund it with cash if you were fortunate enough or get an approval for construction loan.

Construction loans are typically tailored for individuals who have already acquired a parcel of unoccupied land; otherwise, it is probable that you would need to obtain a loan for both the land and construction. They are closely related, yet not entirely identical.

To complete the application process, you will be required to provide details about the land, such as its location, lot number, or street number.

Additionally, either your broker or lender will order a valuation in order to find out the value of the land, which will serve as security for the loan.

Contact us today to get your construction loan application underway. We will walk you through the required process and documentation needed for your situation.

Funds for Vacant Land settlement

Typically, you cannot use the FHOG proceeds for vacant land at settlement. In most cases, the FHOG is only released during the construction phase.

However, some lenders may allow an amount equivalent to the approved FHOG (First Home Owner Grant) to be advanced from the borrower’s approved construction loan for use at the borrower’s vacant land settlement.

The borrower must meet the criteria of being a First Home Buyer, qualifying for the grant, and purchasing vacant land with construction lending approval prior to land settlement.

This amount will be advanced from your approved construction loan and is solely designated for use at land settlement. At the first progress payment stage, the approved government grant will be credited back to your construction loan, ensuring sufficient funds are held to meet construction costs.

Fixed Price Building Contract

Prior to commencing construction on a new home or investment property, obtaining a fixed-price building contract from a licensed builder is crucial.

Typically, this contract details the overall project cost, encompassing construction stages, fees, and any modifications to the original plans.

Typically, the repayment structure of your construction loan will be tailored to the fixed-price building contract. The lender will gradually release funds as the construction moves forward.

Most lenders require interest-only payments during construction, although some may require principal and interest repayments.

If your lender permits interest-only payments, it can assist with cash flow, and you may have the option to make extra repayments.

Once construction is done and your new home is finished, your loan will typically convert to a principal and interest loan. Regular repayments will be calculated on the full loan amount after it is fully drawn.

Although variable rate construction loans are widespread, there is significant variation in comparison rates and lending criteria among lenders.

Speak to us for expert guidance on your situation and let us find the most suitable option for you. Depending on your circumstances, lenders mortgage insurance may be applicable if the deposit amount and property value indicate an LVR over 80%.

How Do Construction Loans Work?

Construction Loan Basics

As previously mentioned, a construction loan is a home loan for individuals who want to build their own house. Construction loans differ from traditional home loans as they involve multiple stages of fund drawdown throughout the construction process.

Payments You Must Make During Construction

During the construction process, you’ll typically make interest-only payments on the amount you’ve drawn down, therefore only incurring interest on the amount drawn down.

As you draw down more funds, your loan will increase, leading to higher interest repayments until the construction is complete.

Progress Payments

As your builder progresses through different stages of the construction process, your lender will disburse progress payments directly to them. These payments are often referred to as ‘progressive drawdowns’ or ‘progress payments.’ It’s crucial to have a clear understanding of these payment milestones in your building contract to ensure your construction progresses smoothly.

If you’re a first-time home buyer, keep in mind that construction loans have specific lending criteria. Reach out to us today for expert guidance in this process.

Building Contract Progress Payment Schedules

Stage 1
Stage 1

Slab/Base 10% of contract price

At this stage, the foundation of the building is laid, and the payment will be approximately 10% of the total contract price. This is critical for ensuring a stable and robust base for the construction of your new home.

Stage 2
Stage 2

Frame 15% of Contract Price

The next payment stage is the frame construction, accounting for about 15% of the contract price. This involves erecting the building’s frame or skeleton, which forms the basis for walls, floors, and roofs.

State 3
State 3

Lock Up 35% of Contract Price

“Lock up” refers to the stage when the external shell of the building is completed. The payment associated with this phase is generally 35% of the contract price. At this point, the building should be weatherproof, with doors and windows installed.

Stage 4
Stage 4

Fit out 25% of Contract Price

During the fit-out stage, the interior of the building is completed. This includes tasks like the installation of cabinetry, plumbing fixtures, and electrical work. The progress payment for this stage is typically 25% of the contract price.

Stage 5
Stage 5

Practical Completion 15% of Contract Price

At the practical completion stage, the building is deemed ready for occupancy. Roughly 15% of the contract price is payable at this point. The remaining minor issues, if any, will be addressed in the final progress payment.

Stage 6
Stage 6

Final Progress Payment

The last progress payment includes any remaining work or adjustments from construction. Before making the payment, the lender will arrange a final inspection valuation to ensure everything aligns with the contract.

How We Help Business Owners and other People Get A Better Construction Loan

Over the past 13 years we’ve helped hundreds of self-employed business owners and other people get better finance.

The Right Loan For Your Situation

Unlike other banks and brokers that most commonly cater for wage earners (not business owners), and are restricted to selling their own or brand-approved lending products (whether they are right for you or not), we specialise in working with business owners and have access to hundreds of loan options from dozens of lenders to ensure you get the right loan for your situation.

We Help You Structure Your Loan

While other banks and brokers merely find you a loan, we look at your whole financial situation and help you structure your loans in order to set you up for the future.

We Even Do The Paperwork

Once we find the right home loan, we pre-fill all the forms to save you time and maximise your approval success. And we review everything each year to ensure you’ve always got the right home loan.


Other Self-Employed Business Owners and Individuals We’ve Helped

If you’ve ever tried to get a loan from your bank, you’ll know how hard (and often disappointing) it can be. But it doesn’t have to be that way. Take a look at what some of our clients say about how we helped them get finance for their home, investments, and business:

The team at Pro Options has more than 48 years of combined experience helping self-employed business owners and other indiviuals  get fast approval for better finance. Here’s what some of them say about their results and experience with our team:


We have been using pro options for about 8 years now and they have been able to help us in situations that others considered too difficult. Highly recommended

Jaden Bennett November 3, 2023
On Site

A Huge Thank You To Alex From Our Mortgage Options!!

A huge thank-you to Alex from Our Mortgage Options!! I came across Alex about 18 months ago when my partner and I were trying to get into the housing market as first home buyers. Thank god we found Alex and had him on board to help us with our journey. He guided us all the way from getting our pre approval to buy our land and house making everything so easy and stress free. He found us a great loan and bank, explaining everything we needed to know in plain english. He managed everything related to our bank including progress payments and inspections with his communications always prompt causing no delays. Thank-you Alex for helping us to get our first home:)

Melissa October 2, 2023

I have been working with Alex for 12 years and he has been wonderful to deal with, his knowledge and client focus have saved me thousands of dollars. Highly recommended!

Carl Brooks September 4, 2023

Alex and his team are top notch brokers and always goes beyond the call of duty to help clients, I would recommend his service to anyone needing finance.

Laurence Hugo May 17, 2023
On Site

My Investment Refinance Journey Paid Huge Dividends!!

“As an experienced investor who has required finance for property purchases whether they be for land, units, houses or for construction both in NSW or interstate, I’m always after a better deal. Ultimately the better the deal, the more dollars I can drive back into further investments to achieve my financial freedom dreams and fund my lifestyle that includes a comfortable family home, private school fees for my children, numerous overseas trips, and stepping ever closer to leaving the rat race behind. Recently in this strange Covid-19 world, Alex at Our Mortgage Options managed to refinance my exisiting mortgages and secure me additional construction loan finance that has now paid off handsomely. I’m basically at minimum now $500 a month (or $6000 a year) better off with reduced interest rate payments meaning that the next project after this new property is built, is not that far away. The refinance journey due to financial institution compliance can sometimes be excruciatingly long and frustrating but with Alex in your corner, well worth it!!”

Martin - Western Sydney
Martin - Western Sydney July 1, 2022

Alex was extremely helpful throughout our 1st home purchase. He made the process smooth and hassle free. He is well versed in his field and we would recommend his professionalism to anyone who is needing the guidance that he offered in serving us.

Triatan ross August 28, 2017

Great mortgage brokers. These guys will give you great advice in terms of the best home loan product. Speak to these guys before going to your bank. You won't regret it.

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We regularly review everything to ensure you can be confident you have the right loan for your situation.

Alex Sperling - Finance/Mortgage Broker

Alex Sperling - Finance/Mortgage Broker

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