Building an investment property from the ground up can be a rewarding way to grow your wealth, especially for current and former Australian Defence Force members who understand the value of strategic planning. Construction loans offer a specialised financing solution that differs significantly from standard home loans.
How Construction Loans Work
Unlike traditional mortgages where you receive the full loan amount upfront, construction loans operate on a progressive drawdown system. This means you only access funds as you need them throughout the building process. The lender releases money in instalments based on construction milestones, and you only charge interest on the amount drawn down at each stage.
This approach benefits both you and the lender. You're not paying interest on money you haven't used yet, while the lender has security knowing funds are released according to actual progress.
Progressive Payment Schedule Explained
A typical Progressive Payment Schedule might include these stages:
• Deposit and council plans approval - Initial payment to secure land and obtain permits
• Foundation and slab completion - First major construction milestone
• Frame up - Structural framework completed
• Lock up - Roof, windows, and external doors installed
• Fixing stage - Internal fit-out including plumbers and electricians work
• Completion - Final inspection and handover
Each drawdown requires inspection and approval before progress payments are released. Your Finance & Mortgage Broker will help coordinate these processes with your registered builder and lender.
Interest Rate and Repayment Options
During construction, most lenders offer interest-only repayment options on the drawn amount. This helps manage cash flow while your property isn't generating rental income. Once construction completes, the loan typically converts to a standard investment loan with principal and interest repayments.
The interest rate during construction may differ from the final loan rate, so it's important to understand both components when applying for a loan.
Choosing Your Build Approach
You have several options when constructing an investment property:
House & Land Packages: These streamlined options often come with fixed price contracts, making budgeting more predictable.
Custom Build: Working directly with builders gives you more control but requires careful management of the Progressive Drawing Fee structure.
Knock Down Rebuild: If you find suitable land with an existing structure, you might demolish existing property to create your new build.
Buying Off the Plan: Some construction loan products work with off-the-plan purchases, though terms may vary.
Planning Your Construction Project
Successful construction projects start with thorough planning. Consider these factors:
• Location research - Understanding council restrictions and council regulations in your target area
• Price range - Ensuring your loan amount covers both land and construction costs
• Development application - Meeting all regulatory requirements before starting
• Builder selection - Choosing experienced professionals who understand construction milestones
• Timeline management - Most lenders require you commence building within a set period from the Disclosure Date
Additional Considerations
Construction loans often include provisions for additional payments if needed, but it's wise to budget conservatively. Out of Contract Items not included in your original agreement can quickly add costs.
Some borrowers use construction finance for major home renovations rather than new builds. While similar principles apply, renovation projects may have different approval criteria.
Working with Finance & Mortgage Brokers
Navigation of construction finance requires expertise. Finance & Mortgage Brokers can access Construction Loan options from banks and lenders across Australia, helping you find suitable terms for your situation.
As Defence Force members, you may have access to specialised loan products or more favourable terms. A renovation Mortgage Broker or construction specialist can identify these opportunities while managing the streamlined application process.
Experienced brokers understand the unique challenges of construction financing, from coordinating with builders to managing drawdown timing. They can also help structure your loan to transition smoothly from construction to investment mode.
Building an investment property requires careful planning, appropriate financing, and professional support. With the right preparation and guidance, construction loans can help you create valuable property assets that support your long-term financial goals.
Call one of our team or book an appointment at a time that works for you to discuss your construction loan options and start planning your investment property project.
