Most people do not have the immediate money available to pay for a renovation or build outright, which is why construction loans are a common solution.
What is a construction loan?
A construction loan is a type of home loan designed specifically for building or renovating a property, rather than purchasing an existing one. Unlike a traditional home loan, with a construction loan the bank releases funds in stages (known as draws) as the build progresses, rather than providing the full amount upfront. During the build phase (12-24 months depending on lender) you pay interest only for the amount drawn and, in most cases, it converts to a standard home loan once construction is complete.
How the drawdown process works
Draws are released at approved milestones throughout the build, such as slab-down, frame, lock-up, fix, and practical completion. After each milestone, the lender will usually arrange an inspection, to verify the work has been completed before releasing the next payment. This is a very useful aspect of a construction loan as it adds a layer of due diligence by the lender who ensures the work is done before payment is made.
This process typically takes 5-7 business days per draw, although timeframes are lender dependent.
Common milestones
- Preparation and site works (site clearance, slab)
- Framing and roof (structural frame, roof covering)
- Plumbing, electrical, and mechanical rough ins
- Internal fixtures and scaffolding removal
- Lock-up (external doors/windows installed)
- Plumbing, fittings, internal finishes
- Practical completion (snagging, defects resolved)
- Final completion and occupancy
Interest and payments
During the construction phase, you typically pay interest only on the funds that have been drawn, not the full loan amount. Principal repayments may start once construction is complete or when the loan converts to a standard home loan.
Risks and considerations
- Additional costs to consider include lender establishment fees, valuation fees, title searches, and mortgage insurance (if applicable).
- Construction delays can affect funding timelines, so it’s important to allow for contingencies such as weather delays, supply chain issues, and scope changes.
- Ensure your builder’s contract clearly documents milestones, payment schedules, and what constitutes “progress” for draw purposes.
- Confirm whether the loan converts to a standard mortgage after completion and under what rates and repayment terms.
When is the right time to apply for a construction loan?
The earlier you engage a mortgage broker, the better. I can help you understand your borrowing capacity, apply for pre-approvals (although not all lenders do pre-approvals for construction loans), and let you know what additional information is required compared to a standard home loan.
How we can help you secure the loan you need
We guide you through lender options and construction loans. Not all lenders offer construction loans, and even fewer are construction friendly in all aspects.
We also help you identify upfront what extra information lenders may require, such as builders’ contracts, architect drawings, quotes for items excluded from builders’ contract, so that your loan application progresses with minimal delays.
Additionally, we can help you plan for contingencies by identifying options such as cash-out loans, giving you access to emergency funds if needed. We remain your point of contact throughout the process, providing advice and support as your build progresses.
If you would like to discuss this further, please do not hesitate to [contact us]
