How Do Construction Loans Work?

Do you wish to start building your dream home from scratch? Maybe you’re looking forward to enlarging your existing home to adjust to your expanding family. Either way, a construction home loan could be a perfect fit for you.

Construction loans are particularly beneficial for first-time homebuyers who desire to have not only more control over the construction project of their dream homes, but also more control over their financial circumstances. With progress payments, you can manage your finances independently, limit interest rates, and benefit from other flexible conditions that align with your preferences.


How the progress payments work

When it comes to breaking down how construction loans are structured, the registered builders you opt for will charge you proportionally as the construction work progresses. Generally, these payments are divided into various stages:

  • Initial Stage (preparing documentation such as building plans, permits, connecting fees, insurance, and other complying paperwork)

  • Base Construction (laying the foundations of the building which involves placing the concrete slab, footings, brickwork and other necessary structural work)

  • Framework (installing the approved frame structure of the house)

  • Lockup Stage (adding vital components including windows, doors, roofing, insulation, and exterior finishes)

  • Internal Fitout (installing the functional areas of the house, such as kitchen cabinetry, appliances, and electrical and plumbing systems, while plastering and painting is carried out)

  • Completion (adding the finishing touches to the property, including erecting fences, removing construction debris, and finishing required final touches on the property)


Numerous banks and lenders provide construction home loans, however, there are several criteria and qualifiers that must be satisfied to obtain the loan.

Building a home in Australia typically occurs in two ways: purchasing the land first and then constructing the property on it, or procuring a package of land and house. The two options determine the specific construction home loans for which you qualify.

Below, we’ll outline the process to assist you in determining whether a new construction home loan is the suitable option for you.


Defining what construction loans are when you buy then build

  • Procure a standard home loan for buying a land block (most lenders can lend up to 90% or even 95% of the land purchase price).

  • During the construction of your house, you are likely to be renting somewhere – therefore, you can usually choose interest-only repayments.

  • Select a reputable builder, decide on a suitable house design, and agree on a fixed-price building contract, which includes the home’s plans, specifications, guidelines and construction cost.

  • Usually, the total cost of constructing the property is broken down into 3-6 progress payments as the work advances, including the concrete slab, walls, roof etc.

  • Initially, your home loan is only for purchasing the land, but the loan increases with each construction progress payment (wherein the lender pays the builder for each progress payment, and this amount is added to your loan).


Defining what construction loans are when you purchase a house and land package

  • Buying both the land and constructing the property together results in a defined lump sum figure.

  • First home buyers intending to live in the newly built house may be eligible for the Australian Government’s First Home Loan Deposit Scheme (New Homes) Guarantee. The scheme enables first home buyers to secure a loan with a minimal deposit of only 5%.


Learn more about how construction loans are structured, with Perry Finance

At Perry Finance, we can assist you in selecting an appropriate construction home loan that best suits your specific requirements and circumstances. Our qualified and experienced team specialises in residential loanscommercial loans and development funding – reach out for a consultation today.



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