Progressive drawdown
A construction loan does not hand you the full amount at settlement. It releases funds in stages that follow the build.
- The stagesTypically land or deposit, then slab, frame, lock-up, fit-out and practical completion.
- Each releaseTriggered by an invoice from your builder and, usually, an inspection confirming the stage is genuinely complete.
- What you payInterest only on the balance drawn so far, so holding costs start small and climb as the build progresses.
- At the endOnce the final payment is made, the loan converts to a normal principal-and-interest home loan.
The valuation is of something that does not exist
A lender assessing a construction loan is valuing the completed property, working from your plans and building contract.
That makes the paperwork unusually important. A fixed-price contract from a licensed builder, complete plans, council approval and a clear schedule of finishes are what let a valuer arrive at a number.
The two costs people miss
Interest during the build
You pay interest on a growing balance for the length of the build — quite possibly while also paying rent or an existing mortgage.
Contingency
Site costs, variations, mid-build upgrades and delays all cost money. A fixed-price contract limits some of this, but variations you request sit outside it.
Renovating rather than building
Renovations split into two quite different cases as far as lenders are concerned.
Cosmetic work
Kitchens, bathrooms, flooring, paint, landscaping — no structural change. With enough equity this is often a straightforward loan increase or split.
Structural work
Extensions, removing walls, adding a level, or a knockdown rebuild. Treated as construction, with the same progress payments and on-completion valuation.