By Jason Given - June 2026 - 7 min read
How construction loans work
Unlike a standard home loan where you receive the full amount at settlement, a construction loan releases funds in stages as the build progresses. Each stage is called a progress draw or progress payment, and the builder submits an invoice for each completed stage.
During construction, you only pay interest on the amount that has been drawn down - not the total loan amount. This keeps your repayments manageable while the home is being built. Once the build is complete, the loan converts to a standard home loan with regular principal and interest repayments.
The standard progress payment stages
- 1.Deposit - typically 5% of the building contract, paid when you sign with your builder
- 2.Slab/base stage - around 15-20% of the build cost, paid when the concrete slab or base is laid
- 3.Frame stage - around 20-25%, paid when the frame is erected and roof trusses are in place
- 4.Lock-up stage - around 20-25%, paid when external walls, windows, doors, and roofing are complete and the building is lockable
- 5.Fixing stage - around 15-20%, paid when internal fittings (plumbing, electrical, cabinetry) are installed
- 6.Completion/handover - the final 5-10%, paid when the build passes final inspection and you receive the keys
What lenders need from you
In addition to the standard income and expense documentation, construction loans require:
A fixed-price building contract with a licensed builder. The contract must detail the total cost, the build stages, and what is included. Cost-plus contracts are not accepted by most lenders.
Council-approved plans. The lender needs to see that the development has been approved by the relevant authority.
Builder's insurance. Your builder must have home building compensation cover (previously known as builders warranty insurance) in place before the lender will release any funds.
Construction lending has more moving parts than a standard purchase. Book a free chat and we will walk you through the process, check your borrowing capacity for the total project cost, and find the best construction loan across our panel.
Frequently asked questions
How is a construction loan different from a normal home loan?
A construction loan releases funds in stages as each phase of the build is completed, rather than as a lump sum at settlement. You only pay interest on the amount drawn down at each stage. Once the build is complete, the loan converts to a standard home loan with full principal and interest repayments.
What deposit do I need for a construction loan?
Most lenders require a minimum 5-10% deposit for a construction loan. The deposit is calculated on the total cost - land plus build. If you already own the land, the equity in the land counts toward your deposit. Government guarantee schemes also apply to construction loans.
How long does a construction loan last?
The construction phase typically runs for 6-12 months for a standard home, though complex builds can take longer. Most lenders allow a construction period of up to 12-24 months. If the build runs over, you may need to request an extension from your lender.
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