Construction Loans Explained: How They Work in Australia (2026)
A plain-English guide to Australian construction loans — how progress payments work, what lenders assess, rates, fees, and how to prepare your application.
A construction loan is a specialist mortgage designed for building a new home. Unlike a standard mortgage where you receive the full loan upfront, a construction loan releases funds in stages — called progress payments or drawdowns — as your build reaches key milestones.
How construction loans are different from standard mortgages
| Feature | Standard mortgage | Construction loan |
|---|---|---|
| Funds released | All at once (on settlement) | In 5 stages as build progresses |
| Repayments during build | P&I from day one | Interest-only on drawn balance |
| Loan term | 25–30 years | Build phase (6–12 months) + P&I phase |
| Security | Established property | Land + work-in-progress |
| LVR limit | Up to 95% | Usually 80–90% (varies by lender) |
| Valuation | Purchase price used | ”As if complete” valuation required |
The 5 progress payment stages
Most lenders follow the Housing Industry Association (HIA) standard drawdown schedule. Your builder submits a claim at each stage, the lender arranges an inspection, and the funds are released directly to the builder.
Stage 1 — Slab/Base (12% of build cost) The foundation and slab are complete. This is often the first progress payment after the initial deposit draw (5%, paid at contract signing).
Stage 2 — Frame (17% of build cost) The timber or steel frame is erected and the roof structure is in place. This is where the home starts to take shape visually.
Stage 3 — Lock-Up (25% of build cost) External walls, windows and external doors are installed. The home is now “locked up” — secure from the weather.
Stage 4 — Fixing (23% of build cost) Internal fit-out begins: plasterboard, internal doors, kitchen cabinets, tiling, bathroom fixtures, flooring.
Stage 5 — Completion (23% of build cost) Final finishes, painting, flooring, cleaning. The lender arranges a final inspection and releases the last payment after the practical completion certificate is issued.
Use the Interest During Build calculator to see exactly how much interest you’ll pay at each stage.
What you pay during construction
During the build phase, you pay interest only on the funds drawn to date — not the full loan amount. This is significantly lower than full P&I repayments.
For example, on a $600,000 construction loan at 6.5%:
- After Stage 1 draw ($72,000): ~$390/month interest
- After Stage 3 draw ($414,000): ~$2,240/month interest
- After Stage 5 (full $600,000 drawn): ~$3,250/month interest
Once the final drawdown is complete, your loan converts to a standard principal-and-interest mortgage.
Important: During construction, you’re typically also paying rent. Budget for both.
How lenders assess construction loan applications
Lenders assess your ability to repay the total completed loan — not just the first drawdown. Assessment includes:
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“As if complete” valuation — The bank values the finished property (land + build) before approving. They won’t lend more than their assessed value, regardless of your build contract price.
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Serviceability at assessment rate — Under APRA’s buffer, you’re assessed at your contract rate + 3%. At a 6.5% rate, you’re assessed at 9.5%.
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Fixed price building contract — Most lenders require a signed, fixed-price HIA or MBA building contract with a licensed builder.
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Builder’s licence — Your builder must hold a current builder’s licence in your state.
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Council-approved plans — Building permits/development approvals must be in place before the loan settles.
Construction loan rates
Construction loan rates are typically variable, and slightly higher than standard variable home loan rates — usually 0.1% to 0.5% above the equivalent standard product from the same lender. After construction completes, many borrowers refinance or switch to a better rate.
Current indicative construction loan rates from major lenders range from 5.99% (ING variable, for standard builds) to 6.54% (Westpac). Rates change frequently — check the lender comparison page for current rates.
Key fees for construction loans
Beyond the standard home loan fees, construction loans have specific costs:
- Progress payment inspection fees: $150–$300 per stage × 5 stages = $750–$1,500
- Valuation fee: $450–$800 (varies by lender and property value)
- Construction loan application fee: $300–$600
- Re-draw fees (if applicable): Some lenders charge for accessing extra payments
See the Total Cost of Building calculator to add all these costs to your budget.
Fixed price vs cost-plus contracts
Most lenders require fixed-price contracts. These give you — and the lender — certainty about the total build cost. A fixed-price contract means your builder carries the risk of material cost increases (within the contract terms).
A cost-plus contract (where you pay the builder’s costs plus a margin) is harder to finance, as lenders can’t assess the total loan amount with certainty.
Steps to apply for a construction loan
- Get pre-approval on your land purchase — Some lenders offer land + construction pre-approval simultaneously.
- Sign a building contract — Fixed price, with a licensed builder, council approvals in place.
- Submit to lender — Builder’s licence, contract, council permits, site plans, finishes schedule.
- Valuation — Lender arranges a “as if complete” valuation.
- Formal approval — Lender issues formal approval. Land settlement proceeds.
- Construction begins — First drawdown released. Interest-only phase begins.
- Progress claims — Builder submits claims at each stage; lender inspects and releases funds.
- Completion — Final drawdown, P&I phase begins, loan converted to standard mortgage.
General advice only. Construction loan terms, policies and rates vary by lender. Credit criteria apply. Always seek independent financial advice for your specific situation. Rates verified April 2026.