In short: A construction loan pays your builder in stages (usually base, frame, lock-up, fixing and completion) as the work is done, and you pay interest only on what has been drawn. Get pre-approval before you sign a building contract, budget for variations, and refinance once the build is finished if a better rate is available.

If you’re building a new home or renovating your current one, chances are you’ll need a construction loan to finance your build.

Unlike a standard home loan, a construction loan is structured around the building process, allowing the borrower to make progress payments to the builder at key stages of the build.

These progress payments, also known as ‘progressive draw-downs’, are released periodically from the loan when each payment is due, rather than all at once.

The main advantage of a construction loan is that you only pay interest on the money drawn so far. Some lenders charge a higher rate or extra fees for construction loans, so compare them.

If you’re wondering how you would go about getting a construction loan, we’ve outlined the four key steps in the process below.

Stage One: Preparation

Stage one involves preparing the necessary information and people to ensure the building process is carried out as smoothly as possible.

Firstly, you’ll need to source your builder and get an estimation of the total project costs. Once your plans are finalised, we (the mortgage broker) will source a pre-approval that meets the build’s financial requirements.

After your chosen builder drafts an unsigned build contract (including all specifications), we’ll order a valuation for the home. From here, the standard loan process will apply, including appropriate documentation and settlement. The lender will also provide you with your builder commencement letters.

Stage Two: Build Commencement

As your build gets underway, your builder will start invoicing you progress payments at different stages of the process. The builder will also need to send you a number of bank-specific items (insurance details etc) which we will forward to your lender.

Banks will typically group the construction progress into stages and make payments to your builder upon their completion.

Most commonly, these progress payments follow the stages set out in your building contract (in Victoria, the Domestic Building Contracts Act sets limits on deposits and stage payments):

1. Base (slab) - The foundations and slab. The builder's deposit is paid before this stage.

2. Frame - The exterior walls and frame of the building, including insulation, support structures and conduits for electrical and plumbing.

3. Lock-Up - Referring to the ability to now “lock-up” the property with remaining windows, doors and walls now installed.

4. Fixing - Internal fittings and fixtures such as cabinetry, doors, plumbing and electrical fit-off.

5. Completion - The final progress payment is typically made upon the total completion of the build.

You will then receive confirmation after the bank finalises these progress payments to your builder.

Stage Three: Build Completion

The final progress payment is prepared once the build is complete and the occupancy permit has been issued.

The bank will then organise a final inspection and valuation to assess whether the build was completed successfully and as expected.

After managing any defect fixes and organising a handover date, the final payment will be made and you can move into your new home.

Stage Four: Post Build

At the completion of the construction loan, the normal home loan process will start and your mortgage repayments will kick in.

Builds typically take 6 to 24 months, and rates may have moved in that time. Once the construction stage is over, we review your loan and refinance if a better rate is available.

Our best tips for construction loans?

• Where possible, use a fixed-price building contract. It protects you from rising building costs (not interest rates), and lenders generally prefer it.

• Check your builder is registered with the Victorian Building Authority and that domestic building insurance is in place before work starts.

• Do the appropriate due diligence when choosing your builder. Research how long they’ve been in business and their track record with previous builds, as well as the pride they take in their work. Choosing an unreliable builder can lead to enormous headaches and leave your build at risk of going over budget.

• Do not sign the building contract until you have pre-approval for the construction loan, so you don’t commit to a contract you can't finance.

• Ensure you have a contingency for potential building variations.

• Understand the upfront contribution you will have to make, including how much and when it is needed.

• Although interest-only repayment options are usually available for construction loans, we always recommend you begin paying down the principal as soon as possible.

Frequently asked questions

How does a construction loan work?

The lender approves the total loan but releases money to your builder in stages as each is completed and verified. You pay interest only on the amount drawn, then the loan converts to a standard home loan.

What deposit do I need for a construction loan?

Usually 5–20% of the land and build cost combined, depending on the lender and whether you pay lenders mortgage insurance. Eligible first home buyers may be able to use the 5% Deposit Scheme for a new build.

Can I get a construction loan for a house and land package?

Yes. The land is usually settled first, then the construction loan funds the build in stages.

Last updated: 25 October 2026.

General information only. This article does not take into account your objectives, financial situation or needs, so consider whether it is appropriate for you and seek personal advice before acting. Elephant Financial Pty Ltd trading as Elephant Advisory is an authorised credit representative (ACR 487962) of Yellow Brick Road Aggregation Pty Ltd (formerly Vow Financial Pty Ltd) (ABN 66 138 789 161), Australian Credit Licence 390261.