The short version
- A construction loan pays your builder in stages as the work is done.
- You pay interest only on what's been drawn, often interest only during the build.
- It turns into a standard home loan once the home is finished.
How construction loans work
If you're building a home, or buying a house and land package, a construction loan pays out in stages rather than all at once. The lender pays your builder as each stage is done, such as the slab, frame, lock-up, fit-out and completion, usually after checking the work.
You pay interest only on what's been drawn. Many construction loans are interest only during the build, often for up to 12 months, then become a standard principal and interest loan. Some lenders let you stay interest only for longer.
How it differs from a standard loan
- How much you can borrow depends on your income and credit history, and on the lender's value of the house and land once it's built.
- The first payments usually go to the land, stamp duty and any architect, then to the builder as work goes on.
- Redraw and offset are less common during the build.
Pros
- Interest only on what's been paid out, which keeps costs down during the build.
- The lender checks each stage before paying.
- One loan for the land and the build.
Cons
- More paperwork: a fixed price contract, plans and permits.
- Cost overruns usually come out of your pocket.
- Paying rent and loan interest at the same time during the build.
What you'll need
- A fixed-price building contract with a licensed builder.
- Council-approved plans and the builder's insurance.
- A deposit, and money for costs beyond the contract, as builds often run over.
What to compare
Start with the rate for your situation: the rate a lender offers depends on whether you'll live in the home or rent it out, how you repay, and the size of your deposit. The comparison above picks each lender's rate for your choices.
Then look past the rate.
- Fees: upfront fees, and annual package fees that often come with an offset account.
- Features: an offset account, redraw, extra repayments and the option to split the loan between fixed and variable.
- The comparison rate, which adds standard fees to the rate for an example loan of $150,000 over 25 years.
- Any cashback, but only after the rate and fees, since a higher rate can cost far more over the life of the loan.
Alternatives
- A house and land package, which may need only a single contract.
- Buying an established home with a standard loan.
- A renovation loan or home loan top up, for smaller works.
How to apply
Most people get pre-approval for a construction loan before they start making offers, then the full approval once they've found a home.
- Get your documents together. Payslips, two years of tax returns if you're self-employed, bank statements showing your savings, and details of your debts and credit limits.
- Get pre-approval. It tells you how much you can borrow and shows sellers you're serious. It usually lasts three to six months.
- Find the home and sign the contract. The lender then values the property before it gives full approval.
- Settle. Your lender pays the seller, and your repayments start about a month later.
- Have your fixed price building contract, council approved plans and the builder's insurance ready. The lender needs them before it approves.