Building a custom home gives you control over design, layout, and finishes in a way buying established property never will.
The finance side works differently though. Instead of one lump sum at settlement, construction funding releases in stages as your build progresses. You only pay interest on what's been drawn down, which keeps costs lower during the build phase. But approvals take longer, documentation runs deeper, and lenders assess both you and your builder before committing.
How Construction Funding Differs from Standard Home Loans
A construction loan releases funds in instalments tied to specific milestones such as slab down, frame up, lockup, and practical completion. Each stage requires a progress inspection by the lender's valuer before the next payment is authorised. You're charged interest only on the amount drawn down at each stage, not the full loan amount, which means your repayments start low and increase as more funds are released.
Consider someone building a custom home on land they already own. The loan might be set at $450,000 for the build. After slab completion, the first progress payment of $90,000 is drawn down. Interest is calculated only on that $90,000 until the next stage is reached. By lockup, total drawdown might sit at $270,000, and interest adjusts accordingly. This progressive structure reduces interest costs during construction compared to borrowing the full amount upfront.
Most lenders structure these as interest-only during construction, converting to principal and interest repayments once the build is complete. The construction phase typically runs six to twelve months depending on complexity, weather, and builder schedules. Once you receive the occupancy certificate, the loan converts to a standard home loan with regular repayments.
Fixed Price Contracts and Why Lenders Require Them
Lenders will ask whether you're building under a fixed price building contract or a cost plus arrangement. Under a fixed price contract, the builder agrees to deliver the home for a set amount, with variations charged separately. Under cost plus, you pay the builder's actual costs plus a margin, which can shift as the project progresses.
Most lenders only approve construction finance for fixed price contracts with a registered builder. The contract protects both you and the lender from cost blowouts and provides a clear scope of work tied to council-approved plans. The builder carries responsibility for delivering what's specified, and the lender knows exactly how much will be drawn down across the progress payment schedule.
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If you're pursuing owner builder finance, expect stricter conditions. Lenders treat you as both borrower and builder, which increases their risk. You'll need to demonstrate construction experience, provide detailed costings, and often accept a lower loan amount relative to the project value. Some lenders won't offer owner builder finance at all.
Progress Payment Schedules and How Drawdowns Are Managed
The progress payment finance structure follows a schedule agreed between you, your builder, and your lender. Typical stages include deposit, base stage or slab, frame, lockup, fixing, and practical completion. Each stage represents a percentage of the total build cost, and payment is only released after a progress inspection confirms the work is complete to an acceptable standard.
Your builder will invoice you when they reach each milestone. You forward that invoice to your lender, who arranges an inspection. Once the valuer confirms the stage is complete, the lender releases funds directly to the builder or into your account, depending on the loan structure. Most lenders charge a progressive drawing fee each time funds are released, typically between $150 and $400 per drawdown.
In one scenario, a couple building in regional Victoria experienced a delay when their builder submitted the lockup invoice before external cladding was finished. The lender's valuer noted the incomplete work, and the drawdown was held until the builder rectified it. This process protects you from paying for work that hasn't been delivered and ensures the build stays on track with the agreed scope.
Land and Construction Packages Versus Buying Land First
You can finance a land and construction package as a single loan or buy suitable land first and apply for construction funding separately. Buying land first gives you time to finalise plans, choose a builder, and secure council approval without pressure. But you'll be paying interest on the land loan while you're organising the build, which adds to your holding costs.
A land and build loan combines both components into one approval. The land portion settles first, and interest begins immediately. The construction portion remains undrawn until building commences. Some lenders require you to commence building within a set period from the date the land settles, often six to twelve months, or they may withdraw the construction approval.
If you're buying a house and land package from a developer, the land and construction finance is usually structured around their standard plans and preferred builders. These packages can speed up approvals because the lender is familiar with the builder and the estate, but you'll have limited flexibility on design changes.
Development Application, Council Approval, and Why Timing Matters
Your lender won't release construction funds until you have full council approval and signed contracts with a registered builder. The development application process varies by council, but expect it to take anywhere from a few weeks to several months depending on the complexity of your design and local planning rules.
Once council plans are approved, you'll need to engage a builder, finalise the contract, and submit everything to your lender for final construction loan approval. Lenders will verify that the contract price aligns with their valuation, that the builder holds appropriate licences and insurance, and that the project is financially viable.
If you're planning custom design work or building in a bushfire-prone or flood-affected area, expect the approval process to take longer. Some councils require additional reporting from engineers, bushfire consultants, or environmental specialists before they'll issue a permit. Factor this into your timeline and avoid committing to a builder start date until all approvals are locked in.
Renovation Finance and How It Compares to New Builds
A house renovation loan works on similar principles but applies to existing homes. Funds are released progressively as work is completed, and lenders require fixed price contracts with licensed tradies for structural work. Cosmetic updates like painting or landscaping are harder to finance this way unless they're part of a larger renovation scope.
Renovation finance suits buyers who want to purchase a dated property and modernise it to suit their needs. Lenders assess the as-is value and the expected value after renovation. Your borrowing capacity is based on the improved value, but drawdowns are staged to match actual progress, just like new builds.
For minor updates that don't require council approval, a standard home loan with a redraw facility or offset account can be more practical than formal construction funding. You avoid progressive drawing fees and inspection costs, and you control the pace of work without needing lender sign-off at each stage.
Why Work with a Broker for Construction Loan Applications
Construction loan applications involve more documentation than standard home loans. Lenders want to see fixed price contracts, council-approved plans, builder credentials, soil tests, engineering reports, and sometimes a quantity surveyor's report. Different lenders have different appetites for project homes versus custom builds, owner builders versus registered builders, and metropolitan versus regional locations.
A broker who understands construction finance can match your project to lenders who are actively writing this type of loan and know which ones will accept your builder, your land type, or your build timeline. We regularly see approvals declined not because the borrower wasn't suitable, but because the lender didn't want that particular build structure or location.
If you're building in a new estate or using a volume builder, some lenders offer streamlined approval processes because they've already assessed the builder's track record and the estate's end values. If you're doing a one-off custom build on rural land, your lender options narrow, and rates may be slightly higher to reflect the perceived risk.
Call one of our team or book an appointment at a time that works for you. We'll walk through your build plans, talk to your builder if needed, and structure the construction funding around your timeline and budget.
