What are Construction Loans for House & Land Packages

A construction loan funds both the land purchase and the building work in separate stages, with money released progressively as construction reaches specific milestones.

Unlike a standard home loan where the full amount settles at purchase, construction finance involves two settlements. The first covers the land component, and subsequent drawdowns occur as the builder completes defined stages such as base, frame, lock-up, and practical completion. Lenders only charge interest on the amount drawn down at each stage, which means your repayments start lower and increase as more funds are released. Once construction finishes, the loan typically converts to a standard variable or fixed rate home loan without needing to reapply.

How the Progressive Drawdown Works

Most lenders release funds in five to six instalments tied to the builder's progress payment schedule. Each drawdown requires a progress inspection conducted by a licensed quantity surveyor or building consultant appointed by the lender. The inspector verifies that work matches the stage claimed by the builder before the bank releases funds. You do not control the timing of these releases, the builder does by notifying the lender when a stage is complete.

Lenders typically charge a Progressive Drawing Fee for each inspection and payment, ranging from $200 to $400 per drawdown depending on the institution. This fee covers the cost of the inspector's site visit and report. Some lenders cap this fee or offer a fixed total inspection cost across all stages, so comparing these charges as part of the overall loan structure makes sense when selecting a lender.

Fixed Price Building Contracts and Council Approval

You will need a fixed price building contract signed with a registered builder before most lenders approve construction finance. The contract must specify the total build cost, a detailed progress payment schedule, and a construction timeline. Lenders require this certainty because cost overruns create funding gaps they are not obligated to cover. If your builder quotes on a cost plus contract basis, most mainstream lenders will not proceed.

Council approval must also be in place before the lender will formally approve the loan. Development application approval confirms the build complies with local planning requirements, and building permits confirm compliance with the Building Code of Australia. In Alexander Heights, council plans typically take six to ten weeks to process through the City of Wanneroo, so factoring this timeline into your finance application is necessary to avoid delays between land settlement and the start of construction.

What Happens Between Land Settlement and the Start of Construction

Once land settlement occurs, you own the block but construction has not started. Most lenders require you to commence building within a set period from the Disclosure Date, typically six to twelve months depending on the institution. If construction has not started within that window, the lender may convert the loan to a standard variable rate or require you to reapply, which can involve re-assessment of your financial position and potentially different terms.

During this period, you make interest-only repayments on the land component. If you purchased land for $180,000 and construction is scheduled to start three months after settlement, you pay interest only on that $180,000 until the first building drawdown occurs. Once the builder completes the base stage and requests the first payment, the lender releases additional funds and your interest calculation adjusts to the new total drawn amount.

Interest Rate Structure and Repayment Options

Construction loan interest rates are typically variable during the building phase, even if you intend to fix the rate once construction completes. Lenders apply this structure because the loan amount changes with each drawdown, making a fixed rate calculation impractical. Once the build reaches practical completion and the loan converts to a standard mortgage, you can choose between variable, fixed, or split rate options depending on your circumstances.

Most lenders offer interest-only repayment options during construction, meaning you only pay the interest charged each month without reducing the principal. This approach keeps repayments lower while the property is not yet habitable and you may still be paying rent elsewhere. After the loan converts to a standard home loan, you typically move to principal and interest repayments over the remaining loan term, though some lenders allow you to continue interest-only for a further period if that suits your financial position.

What Lenders Assess When Approving Construction Finance

Lenders assess your ability to service the full loan amount from the outset, not just the land component. If you are purchasing land for $180,000 and building for $320,000, the lender evaluates whether you can afford repayments on a $500,000 loan plus any additional costs such as stamp duty, legal fees, and the Progressive Payment Schedule fees. This assessment occurs before land settlement, so your income, employment stability, existing debts, and deposit size all influence the approval outcome.

Your deposit will generally need to cover at least 10% of the combined land and construction cost, though some lenders require 20% to avoid lenders mortgage insurance. If you are a first home buyer accessing a government guarantee scheme, lower deposit options may be available, but the lender still assesses your capacity to service the total loan from day one. Working with a mortgage broker in Alexander Heights familiar with construction finance helps identify which lenders align with your deposit size and income structure before you commit to a builder.

Delays, Variations, and Cost Overruns

Construction delays can extend the interest-only period and increase the total interest paid during the build. If a builder scheduled to complete in six months takes nine due to material shortages or weather, you continue making interest payments on the drawn amount for those additional three months. Lenders do not penalise delays, but the extended timeline increases your holding costs.

Variations to the building contract require lender approval if they increase the total build cost beyond the amount already approved. If you decide mid-construction to upgrade flooring or add a feature that increases the contract price by $15,000, the lender reassesses whether the additional borrowing fits within your serviceability and the property's projected value. Variations that reduce value or blow out the budget can result in the lender declining to fund the increase, leaving you to cover the cost from your own savings.

The Conversion to a Standard Home Loan

Once the builder reaches practical completion and you receive the keys, the lender conducts a final inspection and converts the construction loan to a standard home loan. The balance owing becomes the principal, and repayments adjust to either principal and interest or interest-only depending on the terms agreed at the outset. The conversion typically happens automatically without requiring a new application, though the lender may request an updated valuation to confirm the completed property matches the projected end value used in the original approval.

If you intended to fix your interest rate after construction, this is the point at which you lock in the rate. Because fixed rates are determined at the time of conversion rather than at the initial land settlement, movements in the market during the construction period will affect the rate you secure. In a rising rate environment, this can mean a higher fixed rate than anticipated, which is worth considering when planning your longer-term repayment strategy.

Owner Builder Finance and Custom Design Considerations

If you plan to act as an owner builder rather than engaging a registered builder, securing finance becomes more difficult. Most mainstream lenders require a licensed builder with appropriate insurance to manage the construction because the risk of cost overruns, delays, and incomplete work increases significantly when the borrower controls the build. Specialist lenders do offer owner builder finance, but the interest rates are typically higher, deposit requirements are stricter, and the approval process involves more detailed assessment of your building experience and project management capability.

Custom design builds where you engage an architect and a builder separately also require careful structuring. Lenders want to see a fixed price building contract and council-approved plans before approving finance, which means the design phase must be complete and costed before you apply. If you purchase land with the intention to design later, you may need to hold the land on a standard mortgage until the custom design and builder contract are finalised, then refinance into construction finance. This approach works, but it involves two separate loan applications and potentially two sets of establishment costs.

If you are considering a house and land package, the builder typically coordinates the entire process including council plans, contracts, and progress payment schedules, which simplifies the approval process and reduces the risk of delays. Construction loans for package deals are generally more straightforward than custom builds because the lender receives a complete set of documents and timelines upfront, reducing uncertainty and improving approval times.

Call one of our team or book an appointment at a time that works for you to discuss your construction finance options and confirm which lender structure suits your situation before you commit to a builder or sign a contract.

Frequently Asked Questions