Construction Loans & Owner-Builder Finance in Australia

How does a construction loan work?

A construction loan pays for a new home or other dwelling in stages as it is built, rather than in one sum at settlement. The lender sets the loan limit at the start, from the land value, the building contract and what the finished property should be worth.

Progress payments, or drawdowns

Each release is a progress payment, or drawdown. When a stage is finished, your builder issues a progress claim, you authorise payment, and the lender pays the builder directly. Lenders usually expect your own contribution to be spent first, before any loan money goes out.

Interest only on the amount drawn

You pay interest only on the money released so far, not on the full limit, so the balance and the interest grow stage by stage. Many lenders set interest-only repayments during the build and switch to principal and interest at completion. Some private lenders add the interest to the loan instead.

An inspection before each payment

Before each payment, the lender usually sends a valuer or inspector to confirm the stage is complete and matches the plans. Money goes out only for work that has been done, which protects you as well as the lender. Allow for each inspection in your timeline.

Construction loan stages: what is paid, and when

Building contracts set the stages at which the builder can claim payment. The names and the amount at each stage vary between contracts and states, but most builds follow this order.

1. Deposit – paid when the contract is signed, usually from your own funds.
2. Base or slab – site works, footings and the concrete slab or base are complete.
3. Frame – the wall and roof frames are up, and usually checked by the building surveyor or certifier.
4. Lock-up – external walls, roof, windows and external doors are in, so the house can be locked.
5. Fixing, or fit-out – internal linings, cabinetry, doors and fixtures are installed.
6. Practical completion – the home is finished to the contract and ready for handover.

Before the final payment, lenders generally want a final inspection and the certificate that the home can be occupied. Walk through it carefully with your builder first: once the last payment goes out, you have less leverage to get defects fixed.

Finance to build a house on land you own or buy

Building on land you already own

If you own the land outright, its value usually counts as your contribution. If there is a loan on it, the construction loan normally refinances that loan, so one lender holds the security for the whole build.

Buying land and building: house-and-land

Buying land and building means funding the land at settlement, then the construction in stages. A house-and-land package may come as a split contract, one for the land and one for the build, or as a single contract. Lenders treat the two differently, so say which you have.

In a new estate the land may not be titled yet; settlement and the start of the build wait until it is. Lenders also check that the package price is in line with what a valuer thinks the finished home is worth.

Knockdown rebuilds

A knockdown rebuild replaces the house on land you already own. Once the old house is demolished, the property is worth the land alone until the new home is built, so your equity dips during the build. Lenders allow for this when they set the limit.

• Demolition, disconnecting services and site works may sit outside the building contract; get them quoted.
• Your existing home loan usually has to be refinanced into the construction loan.
• You need somewhere else to live for the whole build.

Owner-builder loans and owner-builder finance options

An owner-builder runs the build themselves, hiring trades directly instead of signing a contract with a licensed builder. It can save the builder's margin, but fewer lenders offer owner-builder construction loans in Australia, and those that do ask for more.

Why fewer lenders fund owner-builders

• No fixed-price contract caps the cost of the build.
• No licensed builder is responsible for finishing the work or fixing defects.
• A half-finished house is hard to value or sell if the money runs out.

Lenders that do write these loans often lend less against the property, may want the build taken to a set stage with your own money first, and may fund only part of the budget.

What lenders ask owner-builders for

• Your owner-builder permit or certificate, where your state requires one.
• Your building experience: a trade background, previous builds, or a licensed supervisor for the project.
• An itemised budget backed by written quotes from each trade and supplier.
• A contingency on top of the budget, in cash or within the loan limit.
• Construction insurance, such as contract works and public liability cover.
• Plans, specifications, engineering, the building permit and often a quantity surveyor's report on the budget.

How to present an owner-builder request

Say plainly that it is an owner-builder project, then show the planning: your experience, the costed budget, the contingency, the timeline and who does the structural work. A lender is really asking whether the house will be finished. The more of that your request answers, the more seriously providers can take it.

Builders loans for spec homes and your own projects

Builders sometimes fund their own work: a spec home built to sell, or a house on their own land to keep and rent out. This is business or investment lending, assessed on your track record, the budget, the end value and how the loan is repaid.

• Your licence, insurances and a summary of past builds.
• The cost to complete, often checked by a quantity surveyor, since there is no contract with an outside builder.
• A valuation "as if complete", backed by comparable sales.
• The exit: a sale on completion or a refinance to a long-term investment loan, and how you cover the interest until then.

Building to sell? That is development finance

Townhouses, a subdivision or a multi-unit project built to sell is property development. It is assessed on presales, the project feasibility and your development experience, and works differently from a construction loan for one or two dwellings.

Short-term construction loans from private and non-bank lenders

Short-term construction finance comes mainly from private and non-bank lenders. It runs for the build and a short period after, and is repaid in one payment at completion. It is often used when a bank will not fund the build, or as a step towards a long-term loan.

These lenders focus on the security and the exit. Interest is often prepaid from the loan or added to the balance, so there may be no monthly repayments, but that interest still reduces what is left for the build.

How a short-term construction loan is repaid

• Sale: the finished property is sold and the loan is paid out at settlement.
• Refinance: once the home is complete and valued, a long-term lender pays out the construction loan.
• Other funds you can show will arrive in time, such as the sale of another property.

Lenders test the exit before they lend. If completion slips past the end of the term, extension fees and default interest can be charged, so build a margin for delay into the term you ask for.

Small construction loans, granny flats and secondary dwellings

Small construction loans fund a granny flat, a secondary dwelling, a studio or a second home behind an existing one. Loan requests on ADS.finance start at $100,000, so smaller works fall outside its scope.

For a smaller build, the choice is often between a construction loan paid in stages and an increase on your existing home loan. An increase is paid out at once with less paperwork, but you pay interest on all of it from day one and no lender inspects the work.

• Check what your council allows, including whether a secondary dwelling can be rented out separately.
• Ask how the lender treats two dwellings on one title; policies differ.
• Rent from a secondary dwelling may or may not count as income in a lender's assessment.
• A valuer may add less value than the build costs, which limits what you can borrow.

Farm construction loans and building on rural land

A home on a farm or rural block, or new sheds and farm buildings, is still construction finance, but the land is assessed differently. Rural valuations rely on fewer comparable sales, and many lenders limit the land size, location or zoning they accept.

• A home on a rural residential block is often funded much like a suburban build, if the land fits the lender's policy.
• A home on a working farm may be assessed together with the farm business, its income and its debts.
• Sheds, yards and other farm infrastructure are usually business or agribusiness lending.
• Remote builds can take longer and cost more, as trades and materials travel further; allow for both.

Say in your request what is being built, the land area and use, and whether the property earns income, so providers can see straight away whether they lend on it.

What lenders want to see before construction funding

A construction loan is assessed on you and on the build. Alongside your income, assets and debts, lenders usually ask for:

• A signed, fixed-price building contract with a licensed builder.
• The builder's licence details and insurance, including any home warranty insurance required for the work.
• Plans and specifications, with engineering and soil reports where relevant.
• The building permit and any planning permit the build needs.
• The land title, the purchase contract or a current valuation.
• Quotes for work outside the contract, such as driveways, fencing and landscaping.
• Evidence of your contribution and of how the loan will be repaid.

The valuation "as if complete"

The valuer reports the land as it is today and what the property should be worth once built to the plans. That "as if complete" value and the total cost set how much the lender will lend. If the finished value comes in below the land price plus the build cost, you fund the gap.

Lenders measure the loan against both: the loan-to-value ratio (LVR) against the completed value, and the loan-to-cost ratio against the land and build cost. Each lender sets its own limits, usually tighter for owner-builders and unusual properties.

Variations, cost overruns, delays and the completion valuation

The two big risks in any build are cost and time. The loan is set on the contract price, so anything above it usually comes out of your own pocket.

Variations and cost overruns

A variation is a change after the contract is signed: a different kitchen, an extra window, or work found necessary once the site is opened up. Lenders do not usually increase the loan for variations, so you pay for them, often before the next progress payment is released.

Watch the prime cost items and provisional sums: allowances for things not yet chosen or not yet known, such as fittings or rock excavation. Low allowances make a contract look cheaper than the build will turn out to be.

Delays and the completion valuation

Weather, materials and trade shortages can push out the finish date. Interest, rent and any existing mortgage keep running, and a short-term loan can reach the end of its term first. At completion the property may be valued again, and if it is worth less than estimated, your long-term loan may be smaller than planned.

• Hold a contingency, and do not treat it as spare money.
• Check the builder's licence and insurance before you sign.
• Agree every variation in writing, with a price, before the work is done.
• Ask for a loan term with room for delay.

Repayments during the build, and paying rent at the same time

During construction, repayments are usually interest only and rise as more of the loan is drawn. Full repayments, often principal and interest, start after completion, when the loan moves to its ongoing terms or is refinanced into a long-term home or investment loan.

If you rent while you build, you pay rent and the loan side by side until you move in. Lenders look at whether you can carry both, and so should you, with an allowance for the build running late.

• Work out the repayment at each stage, not just at the start.
• Add rent or your current mortgage for the whole build, plus a margin for delay.
• Check when full repayments start after completion, and what they will be.

Private lender or bank construction loan: what changes

A bank construction loan generally costs less and runs for a long term, but its policy is narrow: a fixed-price contract with a licensed builder, a standard house, and income that passes its serviceability test of whether you can afford the repayments. Owner-builders, cost-plus contracts or complicated income can mean a bank declines.

Private lenders lend on the property and the exit, and assess each loan on its own facts. That suits builds a bank will not take, but it costs more in interest and fees, the terms are short, and you need a clear plan to repay. Non-bank lenders sit between the two.

• Bank or other long-term lender: a standard home, a fixed-price contract and income that fits its rules.
• Non-bank lender: self-employed income, a less standard build, or a credit history a bank will not accept.
• Private lender: owner-builders, builders' own projects, a gap until sale or refinance, or a build others have turned down.

Credit for personal, domestic or household purposes, such as building the home you will live in, is consumer credit regulated under the National Credit Code, and so is credit to build, renovate or improve residential property as an investment. Credit wholly or mainly for business purposes generally falls outside it, and some private lenders lend only for business purposes.

What construction finance costs, by type

A construction loan carries more costs than a standard home loan, because the lender does more work through the build. Compare the total cost, not only the interest rate. Expect some of these:

• Interest on the drawn balance, paid monthly, prepaid or added to the loan.
• An establishment fee for setting up the loan.
• Valuation fees, for the first valuation and each progress inspection.
• Legal and documentation fees, often including the lender's.
• With private lenders, a line fee on the undrawn limit, and fees to extend the term.
• Lenders mortgage insurance on some higher-borrowing loans from mainstream lenders.
• Discharge or early repayment fees, and a broker's fee if your broker charges one.

Outside the loan, budget for permits, insurance, utility connections, quantity surveyor reports and transfer duty on a land purchase. These usually come from your own money, not the loan.

When a construction loan is not the right finance

A construction loan suits a planned build with a clear budget and a clear way to repay. It can be the wrong choice when:

• The work is a smaller renovation that drawing on the equity in your home could cover more simply.
• Your budget has no contingency, or you could not carry the loan and your rent or mortgage if the build ran late.
• The plan relies on a refinance you may not qualify for, or a sale price the market may not deliver.
• You are building several dwellings to sell, which development finance is designed for.

If one of these fits your situation, it may be wiser to wait, reduce the build or save more first.

How to get a construction loan through ADS.finance

ADS.finance is a loan marketplace, not a lender. It does not lend money, give financial or credit advice or recommend any lender or loan. ADS checks every loan request before it goes live to 200+ Australian Finance Providers: private lenders, non-bank lenders, mortgage brokers and commercial finance brokers.

Providers are verified: ADS checks each provider's ABN and business details before an admin approves them. Lenders and brokers, including construction finance brokers, can ask you about your request, and one can take it on and contact you. You are never obliged to go ahead.

There is no credit check to post: ADS.finance does not access your credit file.

What to put in your construction loan request

• The amount (from $100,000) and whether it covers the land, the build or both.
• Where the land is, its value or price, and any loan on it now.
• What you are building: a new home, knockdown rebuild, granny flat, spec home or farm building.
• Who is building: a licensed builder on a fixed-price contract, or you as an owner-builder.
• Where the plans and permits are up to, and when the build should start.
• Your contribution, how soon you need the money and how the loan is repaid at completion.

Each lender and broker sets its own rates, fees and lending criteria, and is responsible for its own licences and disclosures.