Building or renovating? Your step‑by‑step guide to construction loans

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With the cost of living continuing to rise and construction prices remaining unpredictable, many Australians are rethinking how to finance a renovation or new build.

Savings rates aren’t as strong as they were a few years ago, and fewer people have large cash buffers to rely on upfront.

That means choosing the right kind of loan - and understanding how the funding process works — is more important than ever.

What is a construction loan

If you’re planning to update your home, extend your space or build from scratch, a construction loan can give you more control over your cash flow during the project.

A construction loan is a home loan designed to fund a renovation, extension, or new build. Unlike a regular home loan, you don’t receive the full amount upfront - funds are released gradually as your project progresses.

This helps you manage cash flow while your home takes shape.

5 things to know about how construction loans work

Construction loans work differently from standard home loans, and understanding the structure upfront can make planning your build much easier.

Instead of receiving the entire loan at once, the lender releases funds in stages as construction progresses, a process known as progressive drawdown.

You’ll also only pay interest on the money you’ve actually used, not the full approved amount, making repayments more manageable during the build.

This staged approach also protects your budget and ensures each part of the project is completed before the next payment is released.

1. Funds are released in staged progress payments, matching key phases of the build - rather than as a lump sum.

2. You only pay interest on the funds drawn down so far, not on your full approved loan amount.

3. Interest‑only repayments are common during construction, helping ease cash‑flow pressure while paying for building costs.

4. Progress payments protect both you and the lender, ensuring money is only released once each stage has been completed and verified.

5. Once the build is complete, your construction loan typically transitions to a standard principal‑and‑interest home loan.

How to apply for a construction loan

To apply for a construction loan, you'll need to supply your lender with all the usual documentation such as identification and proof of income, expenses and investments.

You may also need to provide some additional documentation concerning the construction of your property, including:

A copy of the building contract (including all variations), between you and the builder in relation to construction (including a copy of the builder's license)
A copy of the plans and specifications approved by the relevant authority in relation to construction
Quotes for any work not being completed by the builder (eg, Driveways, Fencing and Landscaping)
Homeowners warranty insurance
A builders all risk policy and a certificate of currency for that insurance

In some cases, you may also be required to get a valuation that estimates the likely value of your property once it's complete. This ensures that the total amount that you're borrowing won't exceed the value of the build once it's complete.

The stages of your construction loan

In your building contract, your builder will outline the cost of construction. The total cost will usually be split into five segments to be paid at key stages of the build.

It's important to have a discussion with your builder and review the contract and specifications to ensure you understand what is included (or excluded) from the contract.

There are often requirements from councils before you take possession of the property, for items that the builder may not have included. Some examples of these items are: Flooring, Driveways, Landscaping and some appliances.

In these cases you will also need to obtain quotes for these to provide to your lender.

As each stage is finished, you'll generally need to send an invoice from your builder to your lender in order to draw down on your loan. The stages or segments are usually:

1. Slab down

Building the foundations of your property including ground works and plumbing.

2. Frame

Building the frame of your property including construction of trusses, roofing and window frames.

3. Lock up

This phase of the build includes all elements required to lock up the property. That usually covers construction of external walls, installation of doors and windows.

4. Fit out

Installation of fittings such as cabinetry and shelving, taps and sinks, tiles and internal doors.

5. Completion

This stage of the build encompasses everything that's required to complete construction. That might include painting, cleaning and fixing any minor issues.

Once construction is completed and any interest-only period ends, your loan will revert generally to a normal home loan structure. That means you'll be required to make monthly principal and interest repayments, just as you would with a regular mortgage.

2 things to organise before you can move in

Before the final payment can be made to your builder so you can receive the keys to your new home there are a few things that need to be completed.

1. Home Insurance:

You'll need to qualify for and obtain home insurance over your property.

When your property was valued by the bank the was also a notification of the minimum insurance you must carry on the property.

This will need to be provided to the Bank.

2. Occupancy Certificate:

Depending on your state you may need to provide an occupancy certificate or other certification.

For example, in NSW this is provided to you to confirm that the property has been built per the approved plans, is of sound construction and that the property is readily habitable.

This includes completions like boundary fencing, basic landscaping and often driveways that are often not part of the builders' works.

You will need to ensure you arrange with your builder to have these completed and these trades have access to the site.

If these items are not completed, you may not be able to obtain this certificate.

Once these are provided the “Completion Payment" can be made to your builder and you're ready to move in.

Government grants and concessions for building a home

A construction loan isn't the only way to finance a new build or substantial renovation.

In fact, you may be able to receive a government grant to contribute towards your project.

Help To Buy

Help to Buy is an Australian Government shared‑equity program that helps eligible buyers purchase a home with as little as a 2% deposit, with the Government contributing up to 40% for a new build.

You own the home but the Government shares a proportional stake and later shares in any gains or losses when you sell or buy back their equity.

Bank Australia is an approved lender within this scheme: Start your application here.

This program is run by Housing Australia and applications are now open

State level First Home Owner Grants and concessions

Most Australian states and territories offer eligible first home buyers a grant to put towards buying or building a new home.

To check eligibility and find out how to apply for the grant, visit your local state revenue office's website.

Amounts and criteria differ according to your individual situation, for example, to be eligible for the $10,000 grant in NSW, you must meet certain criteria including (but not limited to):

The value of the land and property once completed must be less than $750,000
You must have never owned a home in Australia or received the grant beforePlan to move into the property within 12 months of completion and live there continuously for at least 12 months.

If you're planning on building your dream home, an investment property, or making structural changes to your current home, we'd love to help.

Learn more about our construction loans, use our handy calculator to see how much you could borrow and apply directly online here.