Everything You Need to Know About Construction Loans

A construction loan releases funds in stages as your home is built, not as a lump sum upfront.

If you own land in Mosman or are looking to buy and build, you'll need finance that matches the way builders work. Lenders don't hand over the full loan amount on day one. Instead, they release funds progressively as each stage of the build is completed and inspected. You only pay interest on what's been drawn down, not the total loan amount. Understanding how this works before you sign a building contract will save confusion and help you plan your cash flow.

How Construction Finance Differs from a Standard Home Loan

Construction finance is paid out in instalments tied to your building contract, while a standard home loan is paid in full at settlement.

When you buy an existing home, the lender pays the seller and you start making principal and interest repayments immediately. With construction loans, the lender holds the approved loan amount and releases it according to a progress payment schedule. Most lenders offer interest-only repayment options during the construction period, so you're only paying interest on the amount drawn down so far. Once the build is complete and you have an occupancy certificate, the loan converts to a standard home loan with principal and interest repayments.

Consider a buyer who owns land in Mosman valued at $1.8 million and wants to build a custom home with a construction cost of $1.2 million. They apply for a land and construction package. The lender values the land, reviews the building contract, and approves the total loan amount. Funds are released in five stages: base, frame, lock-up, fixing, and completion. At the base stage, the lender releases around 15% of the construction amount. The buyer pays interest only on that portion until the next stage is reached. By completion, the full loan amount has been drawn and the loan converts to a standard variable or fixed rate product.

What Lenders Look for in a Construction Loan Application

Lenders assess your deposit, income, the building contract, and whether the builder is registered and insured.

You'll generally need a deposit of at least 10% to 20% of the combined land and construction cost, depending on the lender. Your income and existing debts determine your borrowing capacity, just as they would for any home loan. Lenders also want to see a fixed price building contract signed with a registered builder who holds the required insurance. If you're planning to act as an owner builder, expect stricter conditions and fewer lender options. Council approval and stamped plans are typically required before the first drawdown.

In Mosman, where land values are high and building costs reflect the area's expectations around quality construction, your loan amount will likely be substantial. Lenders will assess whether the end value of the completed home supports the total loan. They'll often order a valuation based on the plans, which estimates what the finished property will be worth. If that valuation falls short of the combined land and build cost, you may need to increase your deposit or adjust the scope of the project.

How the Progressive Drawdown Works

Funds are released at set stages, usually base, frame, lock-up, fixing, and practical completion, after a progress inspection.

Each time your builder completes a stage, they'll notify you and request payment. You submit a drawdown request to the lender, who arranges a progress inspection. Once the inspector confirms the stage is complete and the work meets the contract specifications, the lender releases the next instalment directly to the builder or into your account, depending on the contract structure. Most lenders charge a progressive drawing fee for each inspection, typically between $200 and $400 per stage.

Under a cost plus contract, where you're paying for materials and labour with an agreed margin, the payment structure is less predictable and some lenders won't support it. A fixed price building contract with a clear progress payment schedule gives lenders the certainty they need and keeps the process straightforward for you. If your builder is working on multiple projects and delays your build, the construction period extends and you'll be paying interest for longer than expected. That's worth factoring into your budget.

Interest During Construction and After Completion

You pay interest only on the amount drawn down during construction, then move to principal and interest repayments once the build is finished.

During the build, most lenders allow interest-only repayments. If $300,000 has been drawn after the frame stage, you're only charged interest on that $300,000, not the full approved loan amount. Once construction is complete and you have your occupancy certificate, the loan converts to a standard home loan. At that point, you'll start making principal and interest repayments based on the full loan amount and the interest rate agreed at the time of conversion. Some lenders let you lock in a fixed rate at the start of the construction period, while others apply the current rate at conversion. Clarify this before you commit.

Mosman's planning requirements and the demand for high-end finishes often mean construction timelines stretch beyond six months. If your build takes twelve months and you're paying interest only on a growing loan balance, that's a year of interest costs with no equity gain through repayments. Plan for that in your budget and consider whether additional payments during construction make sense for your situation, particularly if you're selling an existing property and have surplus funds before settlement.

Common Conditions and Timeframes

Most lenders require you to commence building within a set period from the loan approval, usually six to twelve months.

If you delay the start of construction, your loan approval may lapse and you'll need to reapply. Lenders also set a maximum construction period, often twelve to eighteen months, depending on the scope of the project. If your build runs over that period due to delays with council plans, weather, or subcontractors, you may need to request an extension and provide updated documentation. Some lenders are more flexible than others, particularly if the delay is due to factors outside your control.

In areas like Mosman, where development application processes can take longer due to heritage overlays and neighbourhood character provisions, factor in extra time before construction starts. Speak with your builder and get a realistic timeline that accounts for council approval and any likely variations. A renovation finance or custom home finance approval that sits unused for months while you wait for permits still has a use-by date.

Choosing Between Construction and Other Loan Types

If you're renovating rather than building from scratch, a standard home loan with a redraw facility or a dedicated house renovation loan may work better.

Construction loans suit projects where the existing dwelling is demolished or where you're building on vacant land. If you're extending or renovating an existing home in Mosman and continuing to live in it, a home loan with access to funds for the renovation can be simpler and cheaper. You avoid progress inspection fees and the loan processes like a standard mortgage. For knockdown rebuilds, a construction loan is usually necessary because the existing dwelling is removed and the project follows the same staged approach as a new build.

Access construction loan options from banks and lenders across Australia by working with a broker who understands the differences between products and which lenders suit owner-occupiers versus investors, or those using a guarantor to reduce the deposit. Not all lenders offer the same flexibility around timeframes, contract types, or owner builder arrangements. Having those options in front of you means you can choose the one that fits your project, not just the one your bank happens to offer.

Call one of our team or book an appointment at a time that works for you. We'll walk through your building contract, confirm your borrowing capacity, and connect you with a lender that suits your build timeline and the type of project you're planning in Mosman.

Frequently Asked Questions