Building a home is exciting. It's also one of the more complex ways to buy property, especially when it comes to the finance side. Construction loans work differently from a standard home loan, and understanding the process upfront can save you a lot of stress (and a few surprises) along the way.
Here's a straightforward look at how construction loans work, what to watch out for, and how to set yourself up for a smoother build.
What Is a Construction Loan?
A construction loan is a home loan designed specifically for building a new home or doing major renovations. Instead of receiving the full loan amount on day one, the funds are released in stages as the build progresses.
This staged approach protects both you and the lender — you're not paying interest on money that hasn't been used yet, and the lender can confirm the build is on track before releasing the next payment.
How Staged Drawdowns Work
The most important thing to understand about construction loans is the drawdown process. Your builder will invoice at agreed stages of the build, and your lender releases funds to pay them at each stage.
A typical five-stage build might look like this:
- Base/slab stage — the foundation is poured
- Frame stage — the structural frame goes up
- Lock-up stage — external walls, roof, windows, and doors are in place
- Fixing stage — internal fit-out (plasterboard, cabinetry, benchtops, wet area tiling)
- Completion stage — final finishes, landscaping handover, and occupancy certificate
At each stage, your builder sends an invoice (called a progress claim). Your lender then arranges an inspection or valuation to confirm the work has been completed before releasing the funds.
The number of stages can vary — some contracts have four stages, others have six. Your building contract will spell out the specific stages and percentages.
Land and Build: Two Parts, One Loan (Usually)
If you're buying land and building separately, your loan is typically structured in two parts:
- Part one covers the land purchase and settles like a regular home loan
- Part two is the construction component, drawn down in stages as the build progresses
Some lenders package this as a single loan with two portions. Others treat them as separate facilities. Your broker will find the structure that works best for your situation and minimises unnecessary costs.
If you already own the land, the construction component is all you need.
What You Pay During the Build
During construction, you typically only pay interest on the amount that's been drawn down — not the full loan. So in the early stages of the build, your repayments are relatively low, and they increase as more funds are released.
For example, if your total construction loan is $400,000 and only $80,000 has been drawn down for the slab stage, you're only paying interest on that $80,000. Once the build is complete and the full amount has been drawn, your loan converts to a standard principal-and-interest (or interest-only) home loan.
This is worth factoring into your budget. Your repayments will gradually increase over the build period, and there's often a gap between when you stop paying rent (if you move out of a rental) and when the house is finished.
Common Surprises (and How to Prepare for Them)
Council and Permit Delays
Getting council approval and building permits can take longer than expected. Weeks can turn into months, and there's not always much you can do to speed things up. Build this buffer into your timeline and your budget — especially if you're paying rent or interest on land while you wait.
Cost Variations
During the build, you might encounter variations — changes to the original scope that affect the cost. This could be anything from unexpected site conditions (rock under the soil, for example) to upgrades you decide on during the build.
Small variations are normal, but they add up. Make sure your budget includes a contingency of at least 5% to 10% above the contract price to cover the unexpected. If your variations push the total cost above what was approved, you may need to go back to the lender for additional approval — which can slow things down.
Builder Delays
Weather, material shortages, subcontractor availability — there are plenty of reasons a build can run behind schedule. Most building contracts include a timeframe, but delays are common. Stay in regular contact with your builder and keep your broker in the loop if things shift significantly.
Interest Adds Up Over a Longer Build
If your build takes twelve months instead of the expected eight, that's four extra months of interest-only payments on an increasing balance. It's not catastrophic, but it's worth being aware of so your cash flow plan accounts for it.
Tips for a Smoother Construction Loan Process
Get Your Finance Sorted Before You Sign the Building Contract
It's tempting to sign with a builder and then worry about the loan, but doing it the other way around gives you much more certainty. You'll know exactly what you can borrow, and your broker can flag any issues with the contract structure before you're locked in.
Choose a Registered and Insured Builder
Lenders require your builder to be registered and hold domestic building insurance. If you're getting quotes, check this early — it's not negotiable from a lending perspective, and it protects you too.
Keep Detailed Records
Save every quote, invoice, variation, email, and receipt. Good documentation makes the drawdown process smoother and gives you a clear trail if anything needs to be resolved later.
Stay in Touch With Your Broker Throughout
Construction loans aren't set-and-forget. Your broker can help manage the drawdown process, liaise with the lender on your behalf, and troubleshoot any issues that come up during the build. The more you keep them in the loop, the fewer surprises there are.
Budget Realistically
Factor in everything: land costs, building costs, landscaping, driveways, fencing, window furnishings, and a contingency buffer. Many first-time builders underestimate the "finishing" costs — the things that aren't included in the base building contract but are needed before you move in.
Building in Ballarat
Ballarat has seen significant growth in new housing developments, particularly in areas like Lucas, Winter Valley, Alfredton, and Bonshaw. If you're looking at a house-and-land package or planning to build on your own block, there are plenty of options — and the costs are generally more favourable than building in Melbourne.
Local builders know the area well, including soil conditions, council requirements, and what works for the climate. If you need recommendations, we're happy to point you in the right direction.
Ready to Talk About Your Build?
If you're planning to build — whether you've found the perfect block or you're still exploring — a conversation with a broker early on can make the whole process clearer.
At Calm Finance Co., we've helped plenty of people through the construction loan process from start to finish. We'll walk you through the structure, find a lender that fits, and be there at every drawdown stage.
Book a free consultation at Calm Finance Co., give us a call, or come and see us at 622 Sturt Street, Ballarat Central. We're happy to help you map it out.