Smart ways to approach building project funding

How Construction Finance Differs from Standard Home Loans

Construction finance releases funds progressively as each building stage is completed, rather than providing the full loan amount upfront.

A standard home loan settles in one transaction because the property already exists. When you're building, lenders only release funds at specific milestones such as slab completion, frame stage, lock-up, and practical completion. This means you only pay interest on the amount drawn down at each stage, not on the total loan amount from day one.

In Glen Iris, where knockdown rebuilds on established blocks are common, this staged funding approach protects both you and the lender. The lender knows the work is progressing before releasing the next payment, and you're not paying interest on the full loan while watching your old weatherboard get demolished and your new build slowly take shape over six to nine months.

Most construction loans include a construction phase with interest-only repayment options, followed by conversion to a standard principal and interest loan once the build is complete. The construction phase typically runs for 12 months, though this can be extended if council approval or building delays push out your timeline.

What Lenders Require Before Approving Construction Funding

Lenders need a fixed price building contract, council approval, and evidence that you can service the loan before they'll approve construction funding.

The fixed price building contract protects you from cost blowouts and gives the lender certainty about the final loan amount. This contract should detail every aspect of the build, from slab to fixtures, and must be signed by a registered builder. Cost plus contracts, where you pay the builder's costs plus a margin, are harder to finance because the final amount isn't locked in.

Council approval means your plans have passed the relevant planning and building permit stages. Lenders won't release funds without this, even if you've been pre-approved. For Glen Iris properties, particularly in heritage overlay areas near High Street or around Gardiner station, this approval process can add several months to your timeline. Factor this into your planning, particularly if you're selling an existing property to fund the build.

You'll also need to demonstrate deposit size and serviceability. Most lenders require a 20% deposit to avoid Lenders Mortgage Insurance, though some will lend with 10% if your income and credit profile are strong. The deposit is calculated against the total project cost, which includes land value plus building costs.

Understanding the Progressive Drawing Fee and Progress Payment Schedule

Most lenders charge a Progressive Drawing Fee each time they release funds, and this fee applies at every stage of the build.

The fee typically ranges from $300 to $500 per drawdown, depending on the lender. If your build has five stages, you'll pay this fee five times. Some lenders cap the total fees, while others charge per inspection. This is one of those details that doesn't appear in headline interest rate comparisons but adds genuine cost to your project.

The progress payment schedule is usually tied to these common milestones: base stage (slab or stumps), frame stage, lock-up (roof and windows installed), fixing stage (plaster, electrical, plumbing), and practical completion. Each stage must be inspected and signed off before the next payment is released. The builder submits a payment claim, the lender arranges an inspection, and funds are released within a few days of approval.

Some builders front-load their payment schedule, asking for a larger deposit or base stage payment. This can create cash flow strain if your deposit is tight. Before signing, compare the builder's proposed schedule against standard industry milestones. If they're asking for 40% upfront and 30% at slab, that's unusual and worth questioning.

The Land and Construction Package Structure

A land and construction package finances both the land purchase and the build under a single loan approval, with the land component settling first.

This structure works well if you've found suitable land in Glen Iris but don't yet own it. The lender approves the total loan amount based on land cost plus estimated building cost. You settle on the land first, then the construction phase begins once you have council approval and a signed building contract. Interest is charged on the land portion from settlement, even while you're waiting for permits and builder availability.

Consider a buyer purchasing a 600-square-metre block in the Glen Iris precinct south of Malvern Road. They arrange a land and build loan covering the land purchase and a custom design build. The land settles in March, but council approval doesn't come through until July, and the builder can't start until September. From March to September, they're paying interest on the land portion of the loan without any construction progress. That's six months of interest cost that needs to be planned for.

Some lenders require you to commence building within a set period from the loan approval or land settlement date. This clause is designed to prevent people from buying land, holding it vacant, and claiming construction loan rates without actually building. If your builder has a long wait list or you're still finalising designs, make sure the lender's timeframe aligns with your reality.

Owner Builder Finance and How It Differs

Owner builder finance is harder to obtain and typically requires a larger deposit because lenders see it as higher risk.

If you're managing the build yourself and paying sub-contractors directly rather than using a registered builder, most mainstream lenders won't offer construction funding. Those that do usually require a 30% deposit and charge a higher interest rate. The lender knows there's no builder's warranty or fixed price contract to fall back on if costs blow out or work quality is poor.

You'll also need to demonstrate project management experience or relevant trade qualifications. A lender isn't going to fund an owner builder project for someone with no construction background. If you've built before or you're a licensed plumber, electrician, or carpenter, you have a better chance, but it's still a harder approval than going with a registered builder on a fixed price contract.

Construction to Permanent Loan Conversion

Once the build reaches practical completion, the loan converts from construction phase to a standard home loan with principal and interest repayments.

Practical completion is the point where the building is finished, you have an occupancy certificate, and you can move in, even if minor defects or landscaping remain. The lender conducts a final inspection, confirms the property is complete, and revalues it based on the finished build. At this point, your interest-only construction loan converts to principal and interest repayments based on the full loan amount.

This conversion happens automatically with most construction to permanent loan products. You don't need to reapply or go through a new approval process. The rate and loan terms you agreed to at the start continue through to the permanent phase. Some lenders offer a fixed rate for the construction phase, others keep it variable. Your choice depends on your rate outlook and how long the build will take.

If you've been living elsewhere and paying rent during the build, this is when your housing costs will shift. Instead of paying interest-only on progressive drawdowns, you're now paying principal and interest on the full amount. Make sure your budget accounts for this step-up, particularly if you've been carrying rent and construction interest simultaneously.

Call one of our team or book an appointment at a time that works for you to discuss how construction funding works for your specific project and which lenders offer the most suitable structure for your build timeline and deposit position.

Frequently Asked Questions