Explainer: how construction loans work

There’s something very special about moving into a newly built home or putting the finishing touches on a major renovation. Maybe it’s the look and feel of new paint and fresh flooring, or just knowing you’ve kicked a worthwhile goal.

Whatever the motivation, plenty of Aussies are rolling up their sleeves right now, with the value of building approvals jumping 14.7% from December 2023 to January 2024.

Meanwhile, on the renovation front, we’re not just pimping our pads for looks and lifestyle.

Almost half the home renovations carried out in 2023 were designed with a ‘green’ focus to improve energy efficiency, according to Houzz Research.

The upshot is that planning a new build or renovation can be exciting and rewarding.

But long before you kick back and enjoy the fruits of your (or your builder’s) labour, you may need to decide how to pay for it all.

And a construction loan could be the right tool for the job.

How do construction loans work?

Construction loans work a bit differently from regular home loans.

Instead of receiving a lump sum from the lender, which is usually the case with a traditional home loan, a construction loan drip feeds funds in line with various stages of the project.

If you’re building a new home, for instance, a lender will typically make progress payments across five main stages, including:

– laying the slab;
– erecting the frame;
– reaching lock-up;
– fitting out your home; and
– completion of construction.

This arrangement can offer valuable advantages.

For starters, paying out smaller sums during the construction period may provide a level of protection for the borrower against a builder being paid for work that isn’t completed.

In addition, while the project is underway loan interest is only calculated on the funds drawn down, not on the final total value of the loan.

During the construction period, you’ll generally be asked to make interest-only payments. This can be a lot kinder on your household budget than principal plus interest payments, especially if you’re renting while the builders are at work.

What to watch for with construction loans

Building projects don’t last forever (though it can feel that way at times), and neither do construction loans.

When your new home or renovation is complete, your construction loan will typically roll into a regular home loan.

It can all sound very simple – and it usually (with any luck) it is.

However, a key challenge with construction loans is that they’re not offered by every lender.

That’s why it can be important to speak to us at an early stage.

We can help you identify lenders with construction loan options that meet your needs and budget, and guide you through the application process.

Our support can save you time and leave you free to focus on your building project.

So if you’re looking to build or renovate, talk to us today about your funding options and we’ll aim to help you get the ball rolling on your construction project sooner.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.