Construction Loans: Everything You Need to Know

What Are Construction Loans?

When you're ready to build your dream home rather than buy an existing property, you'll need specialised construction finance. Unlike standard home loans where you receive the full loan amount upfront, construction loans work differently. Lenders only charge interest on the amount drawn down, which means you'll pay interest only on the funds released at each stage of your build.

Construction loans provide funding through a progressive drawdown system, releasing instalments as your build reaches specific milestones. This approach protects both you and the lender, ensuring funds are available when needed whilst minimising risk.

For ADF members, understanding building finance regulations and how construction funding works can help you make informed decisions about your construction loans for ADF members journey.

Types of Construction Finance Available

Several construction loan options suit different building scenarios:

• Land and construction package: Finance for both purchasing suitable land and building your new home
• Construction to permanent loan: Your construction finance converts to a standard home loan once building completes
• House & land packages: Financing for turnkey solutions from developers
• Owner builder finance: Specialised loans if you're managing the build yourself
• Renovation finance: Funding for major house renovation projects
• Spec home finance: For those building properties to sell
• Custom home finance: Loans for architect-designed, unique builds

ADF members often benefit from working with a renovation finance & mortgage broker who understands the unique circumstances of military life, including postings and deployment schedules.

How the Construction Draw Schedule Works

The construction draw schedule is central to how building loans operate. Your lender releases funds at predetermined stages:

1. Initial deposit: Typically 5-10% when contracts are signed
2. Base stage: Foundation and slab completion
3. Frame stage: When the frame is erected and roof installed
4. Lock-up stage: External walls, windows, and doors completed
5. Fixing stage: Internal fit-out including plumbing and electrical
6. Practical completion: Final inspection and handover

Each stage requires a progress inspection before the lender releases funds to pay sub-contractors. This progressive payment schedule protects everyone involved and ensures quality construction standards are maintained.

Understanding Building Finance Regulations

Australian building finance regulations exist to protect consumers and maintain industry standards. Key regulatory requirements include:

Fixed Price Building Contract: Most lenders require a fixed price building contract with a registered builder. This contract specifies the total project cost and protects you from cost blowouts. Fixed price contracts provide certainty about your loan amount and repayment obligations.

Council Approval: Before construction funding can commence, you'll need council approval through a development application. Your council plans must be approved, and all necessary permits obtained. Lenders won't release funds without proper approvals in place.

Registered Builder Requirements: Lenders typically require your builder to hold appropriate licenses and insurance. Owner builder finance has different requirements and usually demands more equity from borrowers.

Construction Timeframes: Loans often require you to commence building within a set period from the Disclosure Date - usually 12 months. This ensures your loan terms remain current and construction proceeds as planned.

Construction Loan Interest Rates and Fees

Construction loan interest rates may differ from standard home loan rates during the building phase. Understanding the cost structure helps you budget effectively:

Interest Charges: During construction, you'll make interest-only repayment options on drawn funds. Once construction completes, the loan converts to principal and interest repayments.

Progressive Drawing Fee: Lenders charge a Progressive Drawing Fee for administering the progressive payment finance system. This fee covers progress inspections and fund releases, typically ranging from $300-$500 per drawdown.

Valuation Costs: Multiple valuations may be required throughout construction to verify progress and justify fund releases.

The advantage of construction funding is that you're only charged interest on drawn amounts, not the full loan amount. This can result in significant interest savings during the building period.

Application Requirements for Construction Finance

Your construction loan application needs several documents:

• Fixed price building contract with a registered builder
• Approved council plans and development application
• Detailed cost breakdown showing the progress payment schedule
• Builder's licenses and insurance certificates
• Proof of land ownership or land purchase contract
• Standard loan application documents (income, identification, assets)

For house & land package loans for ADF members, much of this documentation comes packaged from the developer, potentially streamlining your application.

Land and Build Options

Many ADF members choose a land and build loan approach, purchasing land first then building later. This provides flexibility if you're waiting for posting stability or saving additional funds.

Alternatively, land and construction packages finance both purchases simultaneously. House & land packages offer another option, where developers provide complete solutions including suitable land and project home loan arrangements.

If you're buying your first home through construction, understanding these options helps you choose the right path. You might also qualify for schemes like the Home Guarantee Scheme which can reduce deposit requirements.

Cost Plus Contracts vs Fixed Price

While fixed price building contracts are standard for construction loans, some custom design projects use cost plus contracts. Under cost plus arrangements, you pay actual construction costs plus a builder's margin.

Most lenders prefer fixed price contracts because they provide certainty about the loan amount needed. Cost plus contracts can make construction loan applications more challenging as final costs remain uncertain.

Building Your Custom Home

Whether you're building a custom design home from scratch or selecting modifications to a project home loan template, construction finance makes it possible to create your ideal property.

Quality construction requires proper planning, appropriate funding, and realistic timeframes. Working with experienced professionals - including registered builders, architects, and specialist mortgage brokers - ensures your build proceeds smoothly.

ADF members often face unique challenges including posting timelines and deployment schedules. Discussing these factors during your construction loan application helps lenders structure appropriate solutions.

Getting Started with Construction Finance

Access construction loan options from banks and lenders across Australia through specialist brokers who understand building finance. They'll help you compare construction loan interest rates, understand progress payment schedules, and structure your construction funding appropriately.

For renovation projects, a house renovation loan or home improvement loan might better suit your needs. If you're renovating your house rather than building new, different loan products and regulations apply.

Understanding building finance regulations, progressive payment structures, and lender requirements positions you for success when building your new home. With proper planning and expert guidance, construction finance can help you build the home you've always wanted.

Defence Loans specialises in helping current and former ADF members navigate construction finance options. Our team understands military life and can structure loans around postings, deployments, and service commitments. Call one of our team or book an appointment at a time that works for you to discuss your construction loan needs.