Construction Loans Explained: Financing a Build

How a construction loan works

1. Approval. The lender assesses you, the land and the build. ANZ and NAB ask for a signed fixed price building contract, plans, and council approval or a building permit.
2. Valuation. The lender values the home. ANZ uses a “Tentative on Completion” valuation, and NAB values before building starts and at the first and final progress claims.
3. Your own money first. If you’re putting in savings, ANZ says you usually pay that share to the builder before the loan is drawn, with some exceptions.
4. Progress payments. At each stage the builder sends an invoice. You sign the builder’s invoice and it goes to the lender, which pays the builder.
5. Final inspection. Around the final payment, the lender does a final inspection or valuation. CommBank inspects after the final invoice, and ANZ values before the last payment.
6. The loan switches. After the final payment, the loan becomes the home loan you chose at the start, and the full term begins.

The stages of a build

CommBank says builds are typically paid in five or six stages, and lists these for a standard house:

• Slab or base: site works and foundations.
• Frame: the frame is up.
• Lock-up: walls, roof, windows and doors on.
• Fit-out: internal linings, cabinets and fixtures.
• Completion: the home is finished and ready to hand over.

Your building contract sets how much is paid at each stage. Lenders check the payment schedule against the build before they agree to it. CommBank says payments to your builder are made after each stage is completed.

How interest is charged

• Only on what’s drawn: CommBank, ANZ and NAB all say you pay interest only on the amount drawn so far. If a third of the loan has been paid to the builder, you pay interest on that third.
• During the build: NAB says repayments can be interest only during the build. CommBank calls its payments in this period interest-accrued payments.
• An offset can help: CommBank says you can link an offset account during the build to reduce interest.
• After the build: after the final payment, the loan moves to the repayment type you chose. ANZ says it switches to principal and interest unless a longer interest-only term was agreed.

Construction loan interest rates

Each lender sets its own rates for construction loans. We don’t quote a rate here because rates change. Check the lender’s current rate and its comparison rate, and ask what rate types are available during the build and after it.

What lenders need

• A fixed price building contract with a licensed or registered builder, including a progress payment schedule. ANZ and NAB both name a fixed price contract. Ask your lender before you consider any other contract type.
• Plans and approvals: council approved plans or a building permit. ANZ says these are generally due within 6 months of loan approval.
• Insurance: ANZ lists home warranty insurance before building starts and building insurance before the final payment. NAB lists builders all risk, home warranty and public liability cover before the first progress payment.
• For each payment: the builder’s invoice and, for NAB, a signed progress claim certificate.
• At the end: NAB asks for an occupancy certificate (or interim certificate) for a new home.
• What the loan is for: CommBank’s loan is for homes you build to live in or keep as an investment, not to sell straight away. ANZ says off-the-plan purchases don’t qualify.

Owner builder construction loans

If you build without a contract with a registered builder, you’re an owner builder. NAB and ANZ say owner builders should speak to a specialist, and their standard construction loan is for a registered builder under a fixed price contract. Other lenders have their own owner builder policies, so ask before you plan around one.

Time limits

Lenders set deadlines to start and finish. CommBank says construction must start within 12 months of the disclosure date on your loan contract and finish within 24 months of the first progress payment. ANZ says you’ll usually need to start using the loan within 6 months and finish within 24 months. Check your lender’s limits against your builder’s timeline.

Costs and risks

• Cost overruns and variations: if the build costs more than the agreed progress payments, you’ll generally need to cover the difference. NAB asks you to contact it right away. Keep a buffer.
• Fees per payment: CommBank charges a Progressive Drawing Fee per progress payment and adds it to the home loan once the final payment is made. Ask other lenders about their fees.
• Valuations: NAB values the work at the first and final progress claims, and ANZ says more valuations may be needed. If a valuation comes in below what you expected, ask the lender what that means for the next payment.
• Delays: weather, trades or approvals can push the build past your lender’s deadline, and you may be paying rent and a loan at the same time.
• Two moves at once: if you’re selling your current home to fund the build, timing matters. A bridging loan is one way some people cover the gap.

Building on land you already own

NAB says land you already own may count toward your share of the project cost. Other lenders differ. ANZ says knock-down rebuilds and renovations can qualify for its construction loan. If you’re buying the land first, the stamp duty calculator shows the duty on the land, and if you’re adding to an existing home, see refinancing to renovate.

Using a broker for a construction loan

We can compare how lenders on our panel handle construction loans: the contract each one needs, how payments are released, the time limits and the fees. Whether a loan suits you depends on your situation, so we start by asking about it. We don’t have a construction loan calculator yet; the borrowing power calculator gives a first look at what you could borrow.

Before you sign the building contract

Get your finance in place before you sign, or make the contract subject to finance. Check the payment schedule with the lender, and ask about fees for each payment, the time limits, rate options during the build, and what happens if costs rise. Keep money aside for variations, landscaping, fencing and window coverings, which are often outside the contract. General information only: every construction loan is subject to the lender’s criteria.

Daniel Innes

Mortgage broker at My Finance Consultants. Daniel compares home loan options from a panel of 40+ lenders for refinancers, investors and home buyers, by phone or video, evenings included. About Daniel

General information only. It doesn’t consider your objectives, financial situation or needs, and it isn’t tax, legal or financial product advice. Lending criteria, fees and charges apply.