Tailored specifically to help aspiring homeowners finance the building of a new home, a construction loan will provide access to the funds needed throughout the building process.

When building a home, the costs involved are split into multiple stages and paid at certain intervals as the work progresses. A construction loan caters to building costs by allowing borrowers to take out funds in partial amounts instead of a lump sum amount.

Lenders only release the appropriate amount of funds needed for each construction stage of the home up to the completion of the new home build. This way, the total cost of the loan is reduced as interest is only paid on drawn-down amounts.

Similar to regular mortgages, most lenders will typically offer a maximum loan-to-value ratio (LVR) of 95% for a construction loan, which leaves the remaining 5% of the property’s value to be covered by the borrower as the deposit.

While a 5% deposit amount may sound appealing for the loan, it also represents a higher risk for lenders, which may be compensated for in the form of higher interest rates. Taking on a construction loan at a lower LVR will reduce the borrowed amount — while this results in a higher upfront deposited amount, it also lowers the overall cost of interest. Generally, construction loans with an LVR of 80% or higher are considered “high-risk” by lenders.

Apart from the general LVR guidelines, lenders also look at factors such as the borrower’s income, spending behaviour, as well as the overall state of personal finances to determine the borrowing amount.

In addition to your personal financial statements, lenders will also ask for the following:

  • The signed building contract
  • A Quantity Surveyor Report
  • Council-approved plans
  • Evidence of builders insurance
  • Quotes for additional work that is not included in the contract
  • First Home Owners Grant (if applicable)

Which building stages are covered?

Stage 1: Foundation

The first stage involves clearing of the land or excavating if necessary to set the foundation for the home. Builders may also be working on the initial plumbing beneath the slab. Approximately 10% of the construction loan will be released at this stage.

Stage 2: Framing

The bones of the house will be installed in the framing stage, including the internal and external framework of the house. This stage may also cover the installation of the roof, gutters, and the insulation of the walls. Approximately 15% of the loan will be released at the framing stage.

Stage 3: Lock up

With the frame of the home in place, the windows and doors will be added to the property. At this stage, plumbing and electrical work can begin within the house. Approximately 35% of the loan will be released at this stage.

Stage 4: Fitting

At this stage, the fittings in the kitchen, bathroom, and other rooms in the house will be installed, giving the property more of a home-like appearance. Roughly 20% of the loan will be released at this stage.

Stage 5: Completion

Final touches (usually aesthetic) will be done at this stage, leading up to the completion of the home. The remaining 15% of the construction loan will be taken out at this stage.

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