What are Construction Loans for Investment Property

What Makes Construction Finance Different for Investment Builds

Construction finance for investment property operates on a progressive drawdown structure rather than a single settlement.

Your lender releases funds in stages as the build progresses, typically after a quantity surveyor or bank-appointed inspector confirms each milestone. You only pay interest on the amount drawn down at each stage, not the full approved loan amount. During construction, most lenders offer interest-only repayment options, which means your out-of-pocket cost during the build is limited to the interest charged on funds released to date.

In our experience, the discipline required to manage a construction project applies whether you're building your own home or an investment. The difference with investment construction is that serviceability calculations need to account for both your current living costs and the future rental income from a property that doesn't yet exist. Lenders apply a discount to projected rental income and assess whether you can service the full loan amount at current variable rates, even while the property generates no income during construction.

Consider a Kooyong investor planning a townhouse development on a subdivided block. The land cost sits around the median for vacant residential lots in the precinct, and the construction contract with a registered builder is priced at a fixed sum. The lender approves finance based on a valuation of the completed property, not the land alone. Funds are released across five stages: deposit, base stage, frame stage, lockup stage, and final completion. At frame stage, roughly 40% of the contract price has been drawn, and the investor pays interest only on that portion. By lockup, around 75% is drawn. The investor holds sufficient cash reserves to cover interest during construction and council holding costs, then refinances to a standard investment loan once the certificate of occupancy is issued and a tenant is in place.

How Fixed Price Building Contracts Affect Loan Approval

Lenders require a fixed price building contract with a registered builder before approving construction funding.

A fixed price contract specifies the total build cost and removes the lender's exposure to cost overruns during construction. The contract must be signed by a builder who holds appropriate registration in the state where the build is taking place, and the builder must carry adequate insurance. Lenders will not approve construction finance for owner-builder projects unless the applicant holds a builder's licence, and even then, panel restrictions often apply.

The progress payment schedule in the building contract must align with the lender's drawdown structure. Most lenders follow a percentage-based drawdown linked to Australian Standard construction stages. If the builder's payment schedule demands 50% upfront, but the lender's policy caps the base stage drawdown at 20%, the deal won't proceed. The contract and the loan terms need to match.

Cost-plus contracts, where the builder charges for materials and labour with a margin on top, are generally not accepted for construction loan purposes. Lenders need certainty on total cost before they commit funding. Without a fixed price, there is no defined loan amount to approve.

Council Approval and Development Application Requirements

You must hold a valid building permit and, where required, council development approval before the lender will issue a formal loan offer.

The development application process in Stonnington, which covers Kooyong, typically involves submission of architectural plans, engineer reports, and in some cases, a town planning permit if the proposed build does not meet the zoning requirements under the Stonnington Planning Scheme. For straightforward single dwellings or dual occupancies that comply with ResCode, a building permit may be all that's required. For anything that exceeds height limits, site coverage, or setback rules, a planning permit is mandatory.

Lenders will issue conditional approval before permits are finalised, but they will not release any funds until all permits are stamped and the building contract is signed. The commencement clause in most construction loan offers requires you to commence building within a set period from the disclosure date, often 12 months. If permits are delayed and construction has not started within that window, the loan offer lapses and you'll need to reapply.

In a scenario where an investor has secured land in Kooyong for a knock-down rebuild investment, council approval for the new dwelling took five months due to objections related to overlooking from a second-storey balcony. The lender held the conditional approval open during this period but required updated income documentation and a revaluation of the land before issuing the final loan documents. Once the planning permit was granted and the building permit issued, the investor had six months to sign the building contract and begin construction. The loan was drawn progressively from that point.

Progressive Drawdown and How Interest Accrues During the Build

Interest is charged only on funds drawn at each stage, not on the total approved amount.

If your construction loan is approved for $800,000 and the first drawdown at base stage is $160,000, you pay interest on $160,000 until the next stage is drawn. At frame stage, another $160,000 might be released, taking the total drawn to $320,000. Interest then applies to that higher balance. Most lenders calculate interest daily and charge monthly, and during construction you typically make interest-only payments.

Some lenders charge a progressive drawing fee each time funds are released, usually between $200 and $400 per drawdown. Across a five-stage build, that adds up to $1,000 to $2,000 in fees. Others bundle inspection and drawdown costs into the loan or absorb them as part of the product structure. It's worth confirming how your lender handles these fees before you commit.

The amount drawn at each stage is determined by a progress inspection, usually conducted by a quantity surveyor engaged by the lender. The inspector confirms that the stage has been completed in accordance with the plans and the building contract, and the lender then releases funds to the builder or to you, depending on how the contract is structured. Most investors arrange for funds to be paid directly to the builder to keep the process moving, but the loan is in your name and you remain responsible for repayment regardless of builder performance.

What Happens After Practical Completion

Once the build reaches practical completion and a certificate of occupancy is issued, the loan converts to a standard investment loan structure.

At this point, you can choose to remain on interest-only repayments or switch to principal and interest, depending on your cash flow and investment strategy. The property is now valued as a completed asset, and rental income can be used to service the loan. Most lenders will require a final valuation and evidence that the dwelling is either tenanted or listed for lease before converting the loan. If you're holding the property vacant, serviceability will still be assessed on your personal income alone.

If you're planning to build multiple properties or move on to another development, refinancing the completed investment property through a standard investment loan structure may make sense once you have rental income and a valuation on the finished asset. That frees up your construction facility for the next project, assuming your serviceability supports it.

For Kooyong investors building within proximity to Glenferrie Road's retail and dining precinct, rental demand for quality new builds tends to be solid, particularly for low-maintenance townhouses or architecturally considered dwellings that appeal to professional tenants. The closer you are to public transport and local schools, the shorter the vacancy period after completion.

How Serviceability Is Assessed When the Property Doesn't Exist Yet

Lenders assess your ability to service the full loan amount from day one, even though the property won't generate income until after construction.

Serviceability calculations assume you're paying interest on the full approved loan amount at a floor rate, which is typically higher than the actual rate you'll be charged. Lenders also apply a discount to the projected rental income, often around 20%, and some don't include rental income in the assessment at all during the construction phase. You need to demonstrate that you can meet interest payments on the full amount, cover your current living expenses, and service any other debts, all from your current income.

If you're planning a land and build loan or purchasing a house and land package, the same serviceability principles apply. Your income needs to support the combined land and construction borrowing before the lender will issue an approval.

For investors with existing property holdings, equity from other properties can sometimes be used to support a deposit or cover interest during construction, but that equity is treated as additional borrowing and included in the serviceability assessment. Releasing equity doesn't reduce the income required to service the new loan.

When to Use a Split Between Land Purchase and Construction Finance

If you're buying land and building separately, most lenders will structure the loan in two stages: a land loan and a construction loan.

The land component settles as a standard mortgage, and you begin paying interest on that portion immediately. The construction loan is approved at the same time but remains undrawn until building begins. This approach works well if there's a gap between land settlement and the start of construction, such as when permits are still being finalised or you're selecting a builder.

Some lenders allow you to hold the land loan interest-only while construction is underway, which reduces your repayment during the build. Others require principal and interest repayments on the land from settlement, even if the construction facility is still in drawdown.

If your build is delayed, you'll be paying interest on the land without any rental income to offset it. That's a holding cost you need to factor into your feasibility, particularly if council approval or builder availability pushes the start date out by several months.

For those considering construction loans in Hawthorn or nearby suburbs, similar considerations apply. Land values, construction costs, and rental yields vary by location, but the loan structure and approval process follow the same framework.

How AXTON Finance Structures Construction Loan Applications

We work with lenders across the panel to match your project to a construction loan product that aligns with your timeline, serviceability, and build contract.

Our process involves reviewing your building contract, confirming the progress payment schedule, assessing your capacity to service the loan during construction, and ensuring all council and builder documentation is in order before lodging the application. We coordinate with your builder, conveyancer, and the lender's valuer to keep the approval on schedule.

Call one of our team or book an appointment at a time that works for you.

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