The easiest way to prepare your construction loan

Your construction loan won't be approved just because your plans look right.

Lenders need specific documentation in a specific order before they'll commit, and most delays happen because borrowers think approval means funds are ready to draw. Between conditional approval and your first progress payment, there's a preparation phase that determines whether your builder starts on time or whether you're explaining delays while interest accrues on land you can't yet build on.

What lenders assess before approving construction finance

Lenders assess three separate layers: your ability to service the loan, the viability of the build, and the quality of the contract. Your borrowing capacity covers the first part, but construction loans add another two layers that standard home loans don't require. The lender needs to confirm that the project will deliver a property worth the total loan amount, and that the builder will complete it according to a schedule that protects the lender's security. That means a quantity surveyor's report, a fixed price building contract, and proof that council approval is either granted or imminent.

Consider a buyer in Paddington who secures a 400-square-metre block in one of the heritage conservation areas near Oxford Street. The land is settled, the design is approved by a local architect familiar with council requirements, but the lender declines to release funds because the building contract includes a cost-plus structure instead of a fixed price. The borrower assumes that because the builder is registered and the plans are approved, the contract type won't matter. It does. Lenders won't fund cost-plus contracts for owner-occupiers because the final loan amount becomes uncertain. The buyer has to renegotiate the contract, which delays the start by six weeks and pushes the first draw into a different rate environment.

Fixed price building contracts and why lenders require them

A fixed price building contract locks in the total build cost before the loan is approved. The lender uses that figure to determine whether the completed property will be worth more than the total amount lent, which protects their security if you default halfway through construction. Without a fixed price, the lender can't assess risk, and most won't proceed.

Your contract should specify the total price, a progress payment schedule tied to defined stages, and a start date within a set period from contract signing. The progress payment schedule usually follows a standard structure: deposit on signing, base stage, frame stage, lockup, fixing, and completion. Each stage needs to align with a site inspection before funds are released. If your builder proposes payments that don't match these stages, or if the schedule allows payments before work is verified, lenders will ask for amendments before approving the loan.

Council approval and development consent requirements

You don't always need final council approval before applying, but you do need it before the first draw. Some lenders will issue conditional approval based on a development application that's been lodged but not yet determined, as long as the application is for a standard build in an area where approval is likely. Others won't proceed until consent is granted.

In Paddington, where heritage overlays and streetscape controls apply to most residential blocks, council approval timelines can stretch beyond three months. If you're building near Five Ways or within the Oxford Street conservation area, expect additional scrutiny around facade materials, roof pitch, and setbacks. Your architect or designer should be familiar with Woollahra Council's development control plan for the area, which sets out specific requirements that differ from the standard residential code. Lenders will want to see that your plans comply before they approve the loan, and if council requests amendments after lodgement, you'll need to update your contract and resubmit to the lender.

The construction draw schedule and how payments are released

Lenders don't hand over the full loan amount at settlement. Funds are released progressively as each stage of the build is completed and verified by an independent inspector. You'll typically see five to six drawdowns across the life of the build, with each one covering the cost of the stage just finished.

The schedule is set at the time of approval and tied directly to your building contract. If your builder requests payment before the agreed stage is complete, the lender won't release funds. If the inspector identifies incomplete work or defects, the draw is delayed until those issues are resolved. The timing matters because while you're waiting for funds to be released, your builder may pause work, and you're still making interest payments on the amount already drawn.

You'll also pay a progressive drawing fee each time funds are released, which typically ranges from $200 to $400 per draw depending on the lender. That cost is separate from interest and needs to be factored into your budget alongside council fees, insurance, and any siteworks not covered by the building contract.

How interest accrues during the construction period

You only pay interest on the amount drawn down, not the full loan amount. After the first draw, interest is calculated daily on the outstanding balance and charged monthly. Most construction loans are structured as interest-only during the build, which keeps repayments lower while you're managing both the loan and any remaining rent or mortgage on your current property.

Once construction is complete and the final draw is made, the loan converts to a standard principal and interest home loan. Some lenders handle this automatically, others require you to reapply or refinance. If your income or credit situation has changed during the build, that conversion isn't always straightforward, so it's worth confirming the process with your lender before you start.

What to prepare before lodging your application

You'll need a copy of the fixed price building contract, the full set of council-approved plans, proof of insurance for the build, and evidence that your builder is registered and holds the required licenses. If you're using a guarantor to increase your borrowing capacity or reduce your deposit, the lender will also need a property valuation for the security property and signed guarantor documents before proceeding.

Your builder should provide a progress payment schedule that matches the stages outlined in the contract. If the schedule isn't clear, or if the builder asks for payments that don't align with inspection points, raise it before you sign. Lenders won't approve a loan where the payment terms create risk, and renegotiating a signed contract takes time you don't have if you're trying to meet a start date.

Call one of our team or book an appointment at a time that works for you. We'll review your contract, coordinate the documentation your lender needs, and make sure the draw schedule aligns with your build timeline before anything is lodged.

Frequently Asked Questions