Construction Loans Explained: How They Work in Australia (2026)

A construction loan is a specialist mortgage designed for building a new home. Unlike a standard mortgage where you receive the full loan upfront, a construction loan releases funds in stages — called progress payments or drawdowns — as your build reaches key milestones.

Key facts:

• Construction loans release funds in 5 stages (drawdowns), not as a lump sum
• You pay interest-only on the drawn balance during construction — not the full loan amount
• LVR limits are typically 80–90% (stricter than standard mortgages)
• A fixed-price building contract with a licensed builder is required by most lenders
• Construction loan rates run 0.1%–0.5% above standard variable rates (April 2026)

How are construction loans different from a standard mortgage?

What are the 5 progress payment stages?

Most lenders follow the Housing Industry Association (HIA) standard drawdown schedule. Your builder submits a claim at each stage, the lender arranges an inspection, and the funds are released directly to the builder.

Stage 1 — Slab/Base (12% of build cost) The foundation and slab are complete. This is often the first progress payment after the initial deposit draw (5%, paid at contract signing).

Stage 2 — Frame (17% of build cost) The timber or steel frame is erected and the roof structure is in place. This is where the home starts to take shape visually.

Stage 3 — Lock-Up (25% of build cost) External walls, windows and external doors are installed. The home is now “locked up” — secure from the weather.

Stage 4 — Fixing (23% of build cost) Internal fit-out begins: plasterboard, internal doors, kitchen cabinets, tiling, bathroom fixtures, flooring.

Stage 5 — Completion (23% of build cost) Final finishes, painting, flooring, cleaning. The lender arranges a final inspection and releases the last payment after the practical completion certificate is issued.

Use the Interest During Build calculator to see exactly how much interest you’ll pay at each stage.

What do you pay during the construction period?

During the build phase, you pay interest only on the funds drawn to date — not the full loan amount. This is significantly lower than full P&I repayments, but it can still be substantial when combined with rent.

For example, on a $600,000 construction loan at 6.5%:

• After Stage 1 draw ($72,000): ~$390/month interest
• After Stage 3 draw ($414,000): ~$2,240/month interest
• After Stage 5 (full $600,000 drawn): ~$3,250/month interest

Once the final drawdown is complete, your loan converts to a standard principal-and-interest mortgage. At 6.5% over 30 years, that’s approximately $3,795/month — a significant step-up from the construction-phase interest. Plan for this transition in advance.

Important: During construction, you’re typically also paying rent. Budget for both costs overlapping for the full build duration (6–15 months). For a $600,000 loan, total construction interest over a 9-month build typically runs $15,000–$20,000 before you even move in.

How do lenders assess construction loan applications?

Lenders assess your ability to repay the total completed loan — not just the first drawdown. Assessment includes:

1. “As if complete” valuation — The bank values the finished property (land + build) before approving. They won’t lend more than their assessed value, regardless of your build contract price.

2. Serviceability at assessment rate — Under APRA’s Prudential Practice Guide APG 223, you’re assessed at your contract rate + 3%. At a 6.5% rate, you’re assessed at 9.5%.

3. Fixed price building contract — Most lenders require a signed, fixed-price HIA or MBA building contract with a licensed builder.

4. Builder’s licence — Your builder must hold a current builder’s licence in your state.

5. Council-approved plans — Building permits/development approvals must be in place before the loan settles.

What interest rates apply to construction loans?

Construction loan rates are typically variable, and slightly higher than standard variable home loan rates — usually 0.1% to 0.5% above the equivalent standard product from the same lender. After construction completes, many borrowers refinance or switch to a better rate.

Current indicative construction loan rates from major lenders range from 6.14% (ING variable) to 6.54% (Westpac). Rates change frequently — check the lender comparison page for current rates.

What fees does a construction loan charge?

Beyond the standard home loan fees, construction loans have specific costs:

• Progress payment inspection fees: $150–$300 per stage × 5 stages = $750–$1,500
• Valuation fee: $450–$800 (varies by lender and property value)
• Construction loan application fee: $300–$600
• Re-draw fees (if applicable): Some lenders charge for accessing extra payments

See the Total Cost of Building calculator to add all these costs to your budget.

Do I need a fixed-price building contract?

Most lenders require fixed-price contracts. These give you — and the lender — certainty about the total build cost. A fixed-price contract means your builder carries the risk of material cost increases (within the contract terms).

A cost-plus contract (where you pay the builder’s costs plus a margin) is harder to finance, as lenders can’t assess the total loan amount with certainty.

What are the steps to apply for a construction loan?

1. Get pre-approval on your land purchase — Some lenders offer land + construction pre-approval simultaneously.
2. Sign a building contract — Fixed price, with a licensed builder, council approvals in place.
3. Submit to lender — Builder’s licence, contract, council permits, site plans, finishes schedule.
4. Valuation — Lender arranges a “as if complete” valuation.
5. Formal approval — Lender issues formal approval. Land settlement proceeds.
6. Construction begins — First drawdown released. Interest-only phase begins.
7. Progress claims — Builder submits claims at each stage; lender inspects and releases funds.
8. Completion — Final drawdown, P&I phase begins, loan converted to standard mortgage.

Frequently asked questions

Can I get a construction loan with a 10% deposit?

Yes. Most major lenders (CommBank, ANZ, NAB, Westpac) offer construction loans at 90% LVR with Lender’s Mortgage Insurance (LMI). At 90% LVR, the LMI premium is typically 1.5%–2.5% of the loan amount, which can be capitalised into the loan. Some lenders (Suncorp, St.George) go to 95% LVR with LMI. The minimum deposit also depends on whether you’re purchasing land separately or as part of a house-and-land package. A specialist construction loan broker can confirm which lenders will accept your specific deposit, income profile, and project type before you apply.

How long does construction loan approval take?

Allow 4–8 weeks from application to formal approval — longer than a standard mortgage. The additional time covers the “as if complete” valuation (1–2 weeks), verification of the builder’s licence and building contract, and council permit checks. Pre-approval can typically be obtained in 1–2 weeks, which allows land purchase to proceed while the full construction approval is processed in parallel. Timeline varies significantly by lender — major banks have streamlined construction teams, while some smaller lenders may take longer for complex builds.

General advice only. Construction loan terms, policies and rates vary by lender. Credit criteria apply. Always seek independent financial advice for your specific situation. Rates verified April 2026.