Construction Loan Process: How It Works Step-by-Step

A construction loan is a type of home loan specifically designed for building a new home or doing major renovations. Unlike a standard home loan where you receive the full amount at settlement, a construction loan releases funds in stages as building progresses.

How Construction Loans Differ from Regular Home Loans

The key difference is progressive drawdown. Your lender releases funds at each construction stage, and you only pay interest on the amount drawn — not the full loan.

The 5 Construction Stages

Stage 1: Base/Slab (15-20%) Site preparation, excavation, and concrete slab poured. First drawdown released after inspection.

Stage 2: Frame (20-25%) Timber or steel frame erected. Walls, roof trusses, and basic structure complete.

Stage 3: Lock-up (20-25%) External walls, roof, windows, and doors installed. Building is weather-tight.

Stage 4: Fixing (20-25%) Internal fit-out: plumbing, electrical, plastering, kitchen, bathroom, flooring.

Stage 5: Completion (10-15%) Final fixtures, painting, landscaping, final inspection, occupancy certificate.

Construction Loan Application Process

1. Get pre-approved for the total construction cost
2. Provide building contract, plans, and specifications
3. Lender values the completed property (as-if-complete valuation)
4. Loan approved with drawdown schedule
5. At each stage: builder invoices → valuer inspects → lender releases funds
6. You pay interest-only during construction
7. After completion: loan converts to standard principal + interest

Costs to Budget For

• Council approval fees: $5,000-20,000
• Site costs (soil tests, surveys): $2,000-10,000
• Builder's deposit: 5-10% of contract
• Lender progress inspection fees: $150-300 per stage
• Construction insurance: $1,000-3,000

Owner Builder vs Licensed Builder

Most lenders strongly prefer licensed builders. Owner builder loans are available but typically:

• Lower maximum LVR (60-70%)
• Higher rates
• Require QS reports at each stage
• Limited lender options

FAQs

Can I live in the property during construction?

Generally no — occupancy certificate is issued after completion.

What if the builder goes over budget?

You're responsible for cost overruns. Budget a 10-15% contingency.

Can I use a construction loan for renovations?

Yes, if the renovation is substantial enough. Minor cosmetic work doesn't qualify.

How long does construction loan approval take?

Typically 2-4 weeks, plus time for valuation and contract review.

Do I pay the full loan repayment during building?

No — interest only on the amount drawn to date.

Get expert construction loan advice or book a strategy call.

Last updated: April 2026