Construction loans: how building finance actually works
A construction loan does not hand you the money in one lump sum. It is released in stages as the work is done, and you generally pay interest only on what has been drawn so far. Understanding that timing is what keeps a build from running short of money halfway through.
How progress payments work
Your building contract sets out a schedule of payments tied to stages of the work. When a stage is finished, the builder sends an invoice, you approve it, and the lender checks the progress before releasing the money. In NSW, contracts over $20,000 must include a progress payment schedule, and payments should reflect the work actually done.
Common stages include:
- Deposit
- Base or slab
- Frame
- Lock-up
- Fixing
- Practical completion
The stages and percentages vary by contract and lender. Check them against each other before you sign, because a lender may not release funds for a stage it does not recognise.
What you pay during the build
Repayments are often interest only during construction and are calculated on the amount drawn, so they rise after each stage. Once the build finishes, the loan usually moves to principal and interest. Ask your lender how long the interest-only period lasts, and what happens if the build runs late.
If you are renting or paying another mortgage at the same time, budget for both for the whole build, plus some room for delays.
Estimate it stage by stage with our construction loan calculator
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What lenders usually ask for
- A signed building contract with a licensed builder. Many lenders prefer a fixed-price contract.
- Council-approved plans and specifications, or a complying development certificate.
- A valuation based on the finished home.
- Evidence of home building compensation cover, where it applies.
- The usual proof of income and deposit.
In NSW, residential building work over $20,000 must be insured under the home building compensation scheme. The builder must arrange cover before asking for or accepting any money, so see the certificate before you pay. A deposit above 10% of the contract price may not be recoverable under the cover.
Where building finance goes wrong
- Variations. Changes after you sign can increase the price beyond what the lender approved, and you may need to fund the difference yourself.
- A low valuation. If the finished-home valuation comes in under the build cost, you may need more cash.
- Items outside the contract, such as landscaping, driveways, fences and window coverings.
- Delays. Each extra month can mean more interest and more rent.
- Paying invoices too early. Check the stage is really finished before you approve it.
Land first, subdivisions and owner-builders
If you buy land before building, you may settle the land loan first and start the construction stage later. Some lenders treat vacant land differently from a home, so the deposit they ask for can differ.
Subdivisions and small developments are usually assessed differently, and often on the project as well as on you. Owner-builder projects can also be harder to finance. These are the cases where it pays to check lender policy before you commit. If you are self-employed or buying through a company, your income will be assessed under that lender's own rules too.
First home buyers who are building
In NSW, the $10,000 First Home Owner Grant can apply to a new build, but the land and building contract together must not exceed $750,000. Other schemes have different limits, so check each one for your situation.
Frequently asked questions
Do you pay interest on the whole construction loan?
Generally no. During the build you usually pay interest only on the amount drawn so far, so repayments rise as each stage is paid. Check how your lender handles this.
How much deposit do I need for a construction loan?
It depends on the lender, the loan-to-value ratio and whether you already own the land. A deposit under 20% may mean paying Lenders Mortgage Insurance.
What happens if the build costs more than the loan?
You may need to pay the difference from your own funds or ask the lender to review the loan, which is not guaranteed. That is why variations should be costed before you agree to them.
Can I get a construction loan if I am self-employed?
Yes, subject to lender criteria. You will need to show your income, and options can be narrower, so compare lender policy before you sign a building contract.
Helpful tools & guides
This article is general information only and does not take into account your objectives, financial situation or needs. It is not legal or building advice. Lender criteria and government rules change, so check them for your situation. All loans are subject to lender approval. Sources: NSW Government, SIRA, accessed November 2026.