Compare construction loan rates

What is a construction loan?

If you want to build your own home on an empty block of land you'll need a construction loan rather than a normal home loan.

You can use a construction loan to cover the cost of both buying a block of land and the construction, or just the construction itself. With a construction loan your lender releases funds at each stage of the construction process rather than all of it upfront.

Construction loans can sometimes attract a higher interest rates so it's worth doing your research. Borrowers also need to provide more paperwork to the lender to show they have a council-approved building plan and a fixed contract with a licensed builder.

How do construction loans work?

With a construction loan, your lender considers the total amount you need to borrow in order to pay your builder. Then it breaks down the full amount into separate payments called progress payment.

You receive a payment at the completion of each stage of the construction project rather than all at once. Repayments at this stage are usually interest-only. You don't start paying off the loan principal until the house is complete.

How do repayments work on a construction loan?

Construction loan repayments are interest-only during the construction stage. And you only pay interest on the money you've drawn on to cover the next construction stage.

This means you're not repaying the full loan amount until you've moved in to the house.

Once construction is complete, you start making principal-and-interest repayments on the loan. This is when you start repaying the debt plus interest.

The benefit of this repayment structure is that your repayments during construction are minimal, because you only pay interest on the money you've spent.

What kind of borrowers need a construction loan?

Constructions loans are a suitable mortgage for:

• Owner-occupiers buying land to build their own homes to live in
• Owner-occupiers building homes on land they already own
• Existing home owners looking to make substantial renovations
• Investors looking to build a new investment property

Construction loan for a granny flat

A granny flat can give you extra living space and serve as an investment opportunity. As a property owner, there are various ways you can finance the construction of the flat using the equity in your home, including a construction loan.
The cost involved in adding a granny flat to your home varies depending on the type of granny flat you choose. If you're thinking of adding a granny flat to your property as part of a renovation or extension, then costs could head north of around $120,000. You'll also need to factor in engineering costs and possibly architect's fees, as well as money for any existing or potential hazards such as asbestos.

Pros of granny flat investment properties

• Affordable investment. Buying or building a granny flat is usually cheaper than buying a standalone investment property, allowing you to start your investment portfolio without borrowing a huge amount of money.
• Rental income. Depending on where you live and the size/features of the granny flat, your investment could provide several hundred dollars of rental income per week.
• Adds value. A legally compliant granny flat will add to your property's total value.
• Handy addition. If your circumstances change and you need somewhere for a relative or friend to live, your granny flat can provide the necessary accommodation.

Cons of granny flat investment properties

• Tenants. You'll need to be prepared to deal with tenants living on your property, which could potentially lead to some tense and awkward situations.
• Cost. The cost of constructing a granny flat may be more than you expect and the expenses can quickly add up.

How to apply for construction finance

Getting a construction loan approved takes a bit more paperwork than other home loans. Here's a rough outline of the process:

1. Start by comparing construction loan rates from multiple lenders (see the table above) to get a competitive deal.
2. Work out roughly how much you can afford to borrow for your construction loan, based on your income.
3. Make sure you have evidence of your income and expenses, a detailed building plan (with council approval), a contract from a licensed builder and proof that your builder has the necessary builder's insurance.
4. You can usually apply for a construction loan on your chosen lender's website, or through a mortgage broker.
5. The lender will examine all your documents and conduct a land valuation before (hopefully) approving your loan.
6. Once approved, construction can begin and your lender will release funds as needed (according to the agreed-upon building plan).

Construction loan contracts are a bit more complicated than other loan contracts. With any property transaction, you should always have an expert solicitor or conveyancer review any contracts before you sign them.

Understanding the 5 steps of a construction loan

With construction loans, funds are paid in stages known as progress draws. These stages correspond to the progress of your home's construction. They can vary a little depending on your builder and lender, but generally are as follows:

1. Foundations and footings

• The building site is cleared of any vegetation and debris, and is levelled. Footings for your house are installed and spaces are cut out for the site's plumbing.
• During this time, the concrete slab for your house will be poured. After this, initial plumbing and waterproofing will be installed.

2. Frame-up and brickwork

• The framework, trusses, roof and windows will be constructed. If your home has brickwork, this will be partially done.
• Gutters and insulation will also go in at this stage, as will any conduits for plumbing or electrical work.
• At the completion of this stage, the second progress payment will be made.

3. Lock-up stage

• During the lock-up stage of construction, doors and windows will be installed. All exterior walls will also be completed.
• At the end of the lock-up stage, your home will be sealed and protected from the elements.
• Your lender will make the third progress draw payment to your builder. This is one of the most significant drawdowns, often making up 20–35% of the total building funds.

4. Fit-out

• At the fit-out stage of construction, all fixtures, fittings and appliances will be added.
• Plumbing and electrical work is completed, gutters and downpipes are installed, skirting boards, cornices and architraves are added, kitchen benches and cupboards are put in and shower screens, mirrors, sinks, toilets and faucets are installed.
• At the end of this stage, your lender will make the fourth progress payment to your builder.

5. Practical completion

• Your home is almost finished. Your builder will work on the finishing touches, including painting, any final electrical or plumbing work, final installations of appliances and any other detailing.
• At the end of this stage, which can take up to 8 weeks, you'll do a final walkthrough of your property to identify any problems, and the builder will walk you through the property's features.
• Your lender will also do a final inspection before disbursing the final progress drawdown. After this stage, your construction home loan will also be converted into a traditional home loan.

The pros and cons of construction loans

Frequently asked questions

• How much time do I have to construct my home?

  Most construction loans give you up to 2 years to finish the construction of a new home. If you’ve purchased your vacant block of land as part of your construction loan, the time frame commences after your land purchase has settled.

• Can I add external quotes to my construction loan?

  There are times when you may want to include quotes from external contractors who aren’t with your builder as part of your total mortgage. This might include quotes for air conditioning, floor coverings, driveways, landscaping or a pergola to be added. Some banks will allow you to add individual quotes to your building pack or bank pack that your builder gave you, which lets you include those things in your mortgage amount. The progress draw payments remain the same to your builder, but the payment for those external quotes won’t happen until after the builder has been paid first and your house is at the practical completion stage.

• What happens if my building costs go up?

  Most builders try to offer "fixed price" contracts. While the cost of your new home construction won't change after this has been fixed for you, always be very wary of "variations" added to your final costs by the builder. These can include changes in the footings/foundation price after soil testing has been conducted.

  If your contract includes a "TBA" or "NC" item listed anywhere, ask for verification about this. These are the builder's way of saying that your house price might be fixed, but there might be things that can change in cost that they won't guarantee.

  Price increases can also include any upgrades you may have made during your colour selection process. This is when you arrive at various suppliers to choose your tiles, paint, bricks, roofing and other items that go into your house. Your building contract will include an allocation to cover these things, but if you spend more than you intended, your costs will go up.

  Most banks are quite understanding about this and will expect that all those final variations have been received by the time your finance approval is underway. If there are any changes in pricing after this time, you may have to alert the bank to account for the extra, or you'll need to pay for them yourself.

• What percentage of the building costs am I able to borrow?

  Most banks and lenders will let you borrow up to 95% of the value of the land plus the construction costs. Note that this doesn’t say "95% of market value", as it would if you were buying an established home. Instead, banks use a "To be erected", or TBE valuation to determine what percentage of your costs you can borrow.

  This means the bank will use the actual market value of your land, or the purchase price shown on the purchase contract, whichever is lower. Then it will add the exact cost of your construction to your land value to arrive at a TBE valuation amount.

  This is not the same as the market value of your property once the construction has been completed. If you’re careful with your spending, it could be possible to pay less money constructing your home than it is actually worth in market value once it’s completed. If this is the case, it is very possible to have your newly built home re-valued 3 months after completion to maximise your equity. This is ideal if you intend to refinance after construction is finished to help pay for finishing touches to your home.

• Can I get an interest-only construction loan?

  Yes, you can. In fact, almost all construction loans are set to interest-only payments during the progress draws period. Only after the construction is complete and the final drawdown payment has been made will your loan revert to a full principal and interest payment, unless you specifically request for it to stay on interest-only payments.

• Can I make extra payments during the progress draw period?

  Most banks will allow you to make extra payments off your mortgage while your loan is still in the progress draws stage. Some banks will even let you link a 100% offset account to your mortgage account while it’s still being drawn down. This helps you get ahead on your mortgage while the balance is still low and reduces how much interest you’ll pay overall. Always check with your bank that they’ll allow this.

  Building your own home can mean you get everything exactly the way you want it and with a construction loan you remain in control of the building process at every stage.

• Can I get pre-approval on a construction loan?

  Many lenders offer pre-approval for construction loans. While it's not the same as full approval, you can get some confidence around how much you can borrow. You can get pre-approval before you have a contract with a builder of council-approved plans.

• Can I get a construction loan with a low deposit?

  While some construction loan lenders will require at least a 20% deposit, you can still purchase with as little as a 5% deposit. If you are planning to build your first home you may still be eligible for government schemes like the First Home Loan Deposit Scheme.

How we calculate Home Loan Finder Scores

Read full methodology

What different scores mean

9+

Excellent

These home loans offer low costs, coupled with a host of features, giving the best overall value.

7+

Great

These home loans may have slightly higher interest rates or fewer features but overall, a competitive offering.

5+

Standard

Usually the home loans would offer above average rates. They may still include some competitive features.

0+

Basic

Higher costs and/or fewer features.

What is Finder Score?

The Finder Score crunches 7,000 home loans across 120+ lenders. It takes into account the product's interest rate, fees and features, as well as the type of loan eg investor, variable, fixed rate - this gives you a simple score out of 10.

To provide a Score, we compare like-for-like loans. So if you're comparing the best home loans for cashback, you can see how each home loan stacks up against other home loans with the same borrower type, rate type and repayment type. We also take into consideration the amount of cashback offered when calculating the Score so you can tell if it's really worth it.

Read the full Finder Score breakdown

To make sure you get accurate and helpful information, this guide has been edited by Rebecca Pike and reviewed by Aaron Christie-David, a member of Finder's Editorial Review Board.

Written by

Richard Whitten

Money Editor

Richard Whitten is Finder’s Money Editor, with over seven years of experience in home loans, property and personal finance. His insights appear in top media outlets like Yahoo Finance, Money Magazine, and the Herald Sun, and he frequently offers expert commentary on television and radio, helping Australians navigate mortgages and property ownership. Richard holds multiple industry certifications, including a Certificate IV in Mortgage Broking (RG 206) and Tier 1 and Tier 2 certifications (RG 146), as well as a Graduate Certificate in Communications from Deakin University. See full bio

Richard's expertise

Richard has written 599 Finder guides across topics including:

• Home loans
• Property
• Personal finance
• Money-saving tips