Building your own home is one of the most rewarding (and complex) property decisions you can make. Unlike buying an established property where you get a single loan and make regular repayments from day one, construction loans involve a staged drawdown process that aligns with your building timeline. At Mortgage & Finance Advisory, we help clients across Geelong, the Surf Coast, Melbourne, and regional Victoria with construction finance from initial land purchase through to the final handover.
This comprehensive guide explains how construction loans work in Australia, what you need to qualify, the costs involved, and how to structure your finance to minimise interest charges during the build.
A construction loan is a type of home loan specifically designed for building a new property or completing major renovations. The fundamental difference between a construction loan and a standard home loan is how the funds are released. Instead of receiving the full loan amount upfront, your lender releases funds in stages (called progress payments or drawdowns) as your builder completes specific milestones.
This staged approach protects both you and the lender. You only pay interest on the amount that has been drawn down, not the total loan. If your total construction loan is $450,000 and only $90,000 has been drawn for the slab stage, you only pay interest on that $90,000 until the next drawdown.
Most fixed-price building contracts and lenders work with five or six standard progress payment stages. While the exact percentages can vary between builders and states, the typical breakdown in Victoria is:
| Stage | Description | Typical % | On $450K Build |
|---|---|---|---|
| Deposit | Paid when signing the building contract | 5% | $22,500 |
| Slab/Base | Concrete slab poured or stumps and bearers installed | 15% | $67,500 |
| Frame | Wall and roof framing erected | 20% | $90,000 |
| Lock-up | External walls, roof, windows, and doors installed | 20% | $90,000 |
| Fixing | Internal fit-out: plastering, cabinetry, tiling | 20% | $90,000 |
| Completion | Final handover after inspection and certificate | 20% | $90,000 |
If you don’t already own the land, you have two main options for financing. The first is a combined land and construction loan, where a single loan covers both the land purchase and the building costs. The land component is drawn down immediately at settlement, and the construction portion is drawn progressively as building proceeds. This is the most common and usually the simplest approach.
The second option is separate loans: one for the land purchase and another for the construction. This can make sense if you’re buying land now but won’t start building for some time, or if you want to use different lenders. However, managing two loans means two sets of fees and potentially more complexity.
For most of our clients in Geelong and the Surf Coast, a combined loan is the preferred approach. It keeps everything with one lender, one set of fees, and one application process. Your broker can help you structure the loan so the land portion converts smoothly into the construction phase.
Construction loan requirements are generally stricter than standard home loan applications because the lender is financing a property that doesn’t yet exist. Here’s what you’ll typically need:
A fixed-price building contract. This is the single most important document. Lenders strongly prefer fixed-price contracts because they provide cost certainty. The contract should detail the total build cost, inclusions, specifications, and timeline. Cost-plus contracts (where you pay the builder’s actual costs plus a margin) are much harder to get approved because the final cost is uncertain.
Council-approved plans and permits. Your building plans must be approved by the local council, and you’ll need a building permit before construction can begin. Some lenders will approve the loan subject to permits being obtained, while others require them upfront.
A registered builder. Your builder must be registered with the Victorian Building Authority (VBA) and carry appropriate insurance, including domestic building insurance for projects over $16,000. Lenders will verify your builder’s registration and insurance status.
Standard lending criteria. As with any home loan, you’ll need to demonstrate sufficient income, a clean credit history, genuine savings, and the ability to service the loan. Lenders will assess your ability to make repayments once the full loan is drawn down, not just the initial interest-only payments during construction.
A sufficient deposit. Most lenders require at least 20% of the total project cost (land plus construction) as a deposit to avoid Lenders Mortgage Insurance. Some lenders will accept deposits as low as 5 to 10% with LMI, but fewer lenders offer this for construction loans compared to standard purchases.
A young family in Torquay purchased a block of land for $380,000 and had a fixed-price building contract for $420,000, bringing their total project cost to $800,000. They had $170,000 in savings (just over 21%), which meant they avoided LMI entirely. We secured them a combined land and construction loan at 6.09% variable with an offset account. During the 9-month build, their interest-only repayments started at just $580 per month (on the initial land drawdown) and gradually increased as each progress payment was made. Once construction was completed, the loan converted to a standard principal and interest variable loan.
Construction loan interest rates in Australia are generally comparable to standard variable home loan rates, though they can be slightly higher with some lenders. As of early 2026, construction loan rates from major lenders typically range between 5.89% and 6.49%, depending on the lender, your deposit, and the loan-to-value ratio.
During the construction phase, most lenders only charge interest on the amount drawn down. This means your repayments start small and increase with each progress payment. Once construction is complete and your loan converts to a standard home loan, you begin making full principal and interest repayments on the total loan amount.
Additional costs to budget for include council and planning fees ($5,000 to $15,000 depending on your council), soil testing and site surveys ($2,000 to $5,000), connection of utilities ($3,000 to $10,000), landscaping and fencing (varies significantly), and a contingency buffer of at least 5 to 10% of the build cost for unexpected expenses.
If you’re planning to manage the build yourself as an owner-builder, securing finance becomes significantly more challenging. Owner-builder loans carry higher risk for lenders because there’s no registered builder overseeing the project, no fixed-price contract guaranteeing the total cost, and a higher chance of delays, cost blowouts, or incomplete work.
Most major banks are reluctant to lend to owner-builders, though some specialist and second-tier lenders will consider these applications. You’ll typically need a larger deposit (30% or more), evidence of building experience or qualifications, a detailed budget and project plan, an owner-builder permit from the VBA, and council-approved plans. The maximum loan-to-value ratio for owner-builder loans is usually 60 to 70%, compared to 80 to 95% for standard construction loans with a registered builder.
In Victoria, you need an owner-builder certificate of consent from the VBA if the construction work is valued at more than $16,000. This requires completing an approved owner-builder course. Your broker can identify which lenders are most receptive to owner-builder applications and help you present the strongest possible case.
Construction loans aren’t just for new builds. If you’re planning a major renovation or extension to an existing property, you can also access construction-style finance with progressive drawdowns. This works well for substantial projects like adding a second storey, a major kitchen and living area extension, converting a garage into a studio or granny flat, or undertaking a full gut renovation.
For renovations, lenders will want to see detailed quotes from licensed tradespeople, council-approved plans if structural work is involved, and evidence that the finished property will be worth more than the total investment. The “as-if-complete” valuation is important. It estimates what the property will be worth after the renovation is finished, and lenders use this figure to calculate your loan-to-value ratio.
Step 1: Get pre-approved. Before you commit to a block of land or a building contract, talk to your broker about getting pre-approval. This confirms your borrowing capacity and gives you confidence to proceed. Pre-approval for construction loans requires an estimate of total project costs, but your formal building contract can come later.
Step 2: Purchase land (if required). If buying a vacant block, your land purchase settles first. The land portion of your loan is drawn down at settlement, and you begin making interest-only repayments on this amount.
Step 3: Finalise your building contract. Once you have council-approved plans and a fixed-price contract from a registered builder, submit these to your lender for formal approval. The lender will arrange a valuation based on the plans and contract.
Step 4: Construction begins. Your builder starts work and submits invoices at each progress stage. Your lender may arrange an independent inspection before releasing each progress payment to confirm the work has been completed to the required standard.
Step 5: Completion and handover. Once your builder finishes the work and you receive an occupancy permit, a final inspection confirms everything meets the contract specifications. The final progress payment is released, and your loan converts from construction to a standard home loan.
Underestimating the total project cost. Many first-time builders focus on the building contract price and forget about site costs, council fees, utility connections, landscaping, driveways, fencing, and furnishings. A $450,000 build contract can easily become a $530,000 total project. Always budget for at least 10% above your contract price for unexpected expenses and items not included in the contract.
Not having a contingency buffer. Construction rarely goes exactly to plan. Weather delays, supply chain issues, site conditions, and design changes can all add time and cost. Having a financial buffer (ideally 5 to 10% of the build cost kept in an offset account) gives you breathing room if things don’t go to plan.
Choosing the wrong loan structure. Construction loans differ. Some lenders charge higher rates during the construction phase, some don’t offer offset accounts until the loan converts, and some have more flexible drawdown processes than others. Your broker should compare construction-specific features, not just the headline rate.
Signing a cost-plus contract without lender confirmation. If your builder quotes on a cost-plus basis, check with your lender before signing. Many lenders won’t accept cost-plus contracts, and discovering this after you’ve committed can derail your entire project timeline.
If you’re a first home buyer considering building, you may be eligible for additional government support. In Victoria, the First Home Owner Grant provides $10,000 for new homes valued up to $750,000. This grant applies to newly built homes, including those built under a construction contract, and is paid after the first progress payment or at completion, depending on the grant office’s process.
First home buyers building a new home also benefit from stamp duty exemptions. In Victoria, no stamp duty is payable on new homes valued under $600,000, with concessions available up to $750,000. When buying vacant land to build on, stamp duty exemptions apply for land valued under $400,000.
The First Home Guarantee scheme allows eligible first home buyers to purchase or build with as little as a 5% deposit without paying Lenders Mortgage Insurance. The government guarantees the difference between your deposit and 20%, effectively saving you thousands in LMI premiums. Places in this scheme are limited each financial year, so early application is recommended.
The Geelong region and Surf Coast continue to be popular areas for new construction, with significant residential development in growth areas like Armstrong Creek, Charlemont, Mount Duneed, and Torquay North. Land prices in these areas have stabilised somewhat after the post-pandemic surge, making building an increasingly attractive option compared to buying established homes in more central locations.
When building in the Geelong region, consider factors specific to the area. Coastal properties in places like Torquay, Ocean Grove, and Barwon Heads may require additional site costs for sandy or rocky soil conditions. Properties in bushfire-prone areas along the Surf Coast may need higher BAL (Bushfire Attack Level) construction standards, which can increase building costs by 10 to 20%. Council planning requirements can vary significantly between Greater Geelong City Council and Surf Coast Shire.
A couple looking to build in Armstrong Creek purchased a 400sqm block for $310,000 and signed a fixed-price contract for $350,000 to build a four-bedroom home. As first home buyers, they received the $10,000 FHOG and paid no stamp duty on the land (under the $400,000 threshold). We secured a combined construction loan at 5.99% through a lender offering an offset account during the construction phase. Their total project cost of $660,000 was well within the $750,000 FHOG threshold, and with a 10% deposit plus the grant, they were able to keep LMI costs manageable.
Most lenders require the construction phase to be on a variable rate because the loan balance changes with each drawdown. Once construction is complete and the loan converts to a standard home loan, you can typically choose to fix all or part of your rate at that point. A small number of lenders do offer fixed rates during construction, but these are the exception rather than the rule.
This is why domestic building insurance is critical. In Victoria, builders must take out domestic building insurance for any residential work valued over $16,000. This insurance protects you if your builder becomes insolvent, dies, or disappears before completing the work. It covers the cost of rectifying defective work and completing unfinished work, up to the policy limit. Always verify your builder’s insurance before signing a contract.
Yes, most construction loans allow extra repayments during the build phase. Better yet, if your loan has an offset account, you can park your savings there to reduce the interest charged on the drawn-down amount without locking the money away. This is particularly effective early in the build when only a small portion of the loan has been drawn.
Construction loan approval typically takes 2 to 4 weeks from submission of a complete application, including the signed building contract, approved plans, and all financial documents. However, the total timeline from initial enquiry to approval can be 4 to 8 weeks, as gathering all required documentation takes time. Starting the process early and having your documents ready can significantly speed things up.
Your builder’s construction insurance covers the building works, but you should also consider contract works insurance to cover materials on-site, and public liability insurance if you’ll be visiting the site regularly. Once the home is complete and you take possession, you’ll need standard home and contents insurance. Your lender will require proof of building insurance before releasing the final progress payment.
Our experienced brokers compare options across 60+ lenders to find the right solution for your situation.
Director & Senior Finance Broker
With years of experience in mortgage broking and finance, Melanie helps clients across Geelong, the Surf Coast, Melbourne and regional Victoria navigate the complexities of home loans and business finance. Contact our team on 03 9020 2699.
