Building a new home or investment property is an exciting prospect — and often a smart financial decision. Construction finance works differently from a standard home loan, and understanding how it works can save you significant time, stress, and money.
What Is a Construction Loan?
A construction loan is a home loan specifically designed for people building or substantially renovating a property. Unlike a standard loan where the full amount is advanced at settlement, a construction loan is drawn down in stages — called “progress payments” — as your build progresses. You only pay interest on the amount drawn down, not the full loan amount.
How Progress Payments Work
Most construction loans are drawn down in 5–6 stages: Base/Slab (foundation, ~15%), Frame (~20%), Lockup (roof, windows, external walls, ~25%), Fixing (internal fittings, electrical, plumbing, ~25%), and Completion/Practical Completion (remaining balance). At each stage, your builder invoices and your lender confirms progress before releasing funds.
Interest-Only During Construction
During the construction period (typically 6–18 months), you only pay interest on the amount drawn down. This reduces your repayments during the build — particularly useful if you’re paying rent while your new home is being built. Once construction is complete, the loan typically converts to a standard principal and interest mortgage.
What Do You Need to Apply?
To apply for a construction loan, you’ll need: a fixed-price building contract with a licensed builder, council-approved plans and specifications, land title details, a builder’s insurance certificate of currency, and standard income/financial documentation. The loan is assessed on the end value of the completed property.
Construction Loans for Investment Properties
Building an investment property via a construction loan offers significant tax advantages. New builds attract the highest depreciation deductions (both Division 43 and Division 40 fully available). In most states, you pay stamp duty on the land value only — not the completed building value. And first home buyers building new may qualify for larger government grants.
Common Pitfalls to Avoid
Not getting pre-approved before signing a building contract. Underestimating total build costs (site costs, variations, landscaping, and fencing are often not included in the base contract). Not building in enough buffer for unexpected costs and delays.
Talk to Assembly Finance About Construction Finance
We guide clients through every stage of construction lending — from pre-approval and land purchase to final draw-down and loan conversion. Contact James today for a free construction loan assessment.
