What a construction loan is

A construction loan funds a new home, a knockdown rebuild or a major renovation, and pays the money out in stages as the work goes up rather than in one amount at settlement. Interest is charged only on what has been drawn so far, so repayments start small and rise with each stage. When the build is finished, it becomes an ordinary home loan on the repayment type chosen at the start, usually principal and interest.

Commonwealth Bank, Westpac, NAB and ANZ fund a build through their standard home loans rather than a separate product. The loans in this table come from lenders that publish a construction loan or a construction rate of their own, mostly customer-owned banks and non-bank lenders. A few ordinary home loans, such as some first home buyer loans, also carry a separate rate for the construction period, and this table lists that rate rather than the loan's standard one.

How progress payments work

The building contract sets out a progress payment schedule, usually five or six stages: a deposit, then the base or slab, the frame, lock-up, fixing or fit-out, and practical completion. At each stage the builder issues a progress claim, the borrower signs an authority for the lender to pay it, and the lender may send a valuer to confirm the work before the money is released. Any money the borrower is putting in is generally used first, before the loan is drawn.

Lenders pay each stage only up to the value of the work done. If the build ends up costing more than the loan, the difference, known as a cost overrun, comes from the borrower's own funds, and a lender can hold back further payments until it is covered. Changes to the contract along the way, called variations, generally need the lender's approval before they are agreed with the builder. For a new home, the final payment is usually released once the occupancy certificate has been issued, and that certificate goes by different names in different states.

Repayments during the build

Most loans in this table charge interest only while the home is being built. At an illustrative rate of 7.00% p.a., the first $150,000 drawn on a construction loan costs about $875 a month in interest, and by the time $450,000 has been drawn the interest is about $2,625 a month.

Lenders cap the build period, commonly at between 12 and 24 months. NAB and Commonwealth Bank, for example, expect a build to be finished within 24 months of the first drawing, while some lenders here limit the interest-only construction period to 12 months. Once the home is complete, repayments usually move to principal and interest, though some lenders let an approved interest-only term run on. The rate can change at that point too: at some lenders the loan moves to a different rate after construction, and the product it becomes is chosen when the loan is set up.

Fees on a construction loan

On top of the usual establishment and valuation fees, construction loans often carry costs tied to the build: a fee on each progress payment, an inspection fee at some stages, or a construction administration fee at settlement. Some lenders charge none of these, and ANZ and NAB, for example, charge no progress payment fee. Over five or six stages, a fee on every draw is paid five or six times.

On several loans in this table the comparison rate sits below the advertised rate. The comparison rate is worked out on a standard example of $150,000 over 25 years, so it can take in a lower rate the loan moves to after the build, while the advertised rate is the one charged during construction.

What lenders look at

A construction loan is assessed on income, expenses and deposit like any home loan, and on the build itself. Lenders generally ask for a signed fixed-price building contract with a licensed builder, the plans, specifications and permits, and the builder's insurance, including home warranty insurance, before the first progress payment. The lender also values the land and the proposed home before work starts, and as with any purchase, sizes the loan against the lower of the cost and that valuation. Maximum LVRs vary, and some lenders here price construction loans in LVR bands.

Building with a small deposit

The Australian Government 5% Deposit Scheme covers building on vacant land under a building contract, as well as house and land packages and off-the-plan purchases. The land price and build costs together have to come in under the price cap for the area, and the loan has to be with a participating lender. The First Home Buyer Loans table and the First Home Buyer Guide cover the wider first home market.

How construction loans compare

  • The construction rate, and the rate the loan moves to once the home is finished
  • The longest build period the lender allows on interest-only repayments
  • Fees on each progress payment, on inspections and at settlement
  • The maximum LVR, and whether the rate changes by LVR band
  • Redraw and offset during the build, which some lenders switch off until the home is finished

The Repayment Calculator shows what a rate means each month once the loan moves to principal and interest, the Borrowing Power Calculator estimates what can be borrowed, and loans can be compared side by side.

Construction loans are left out of the main Home Loans tables by default, because a construction rate applies only while a home is being built. On the hub, the Construction loans option under Building a home, in the Detailed filters, lists them on their own.

This is general information, not financial advice. We are a comparison service, not a lender or a broker.