What is construction loan?

A construction loan is structured for building a new home (or major renovation). Instead of drawing down the full loan at settlement like a normal mortgage, the lender releases funds in progressive 'progress payments' tied to construction milestones — typically: slab, frame, lock-up, fixing, completion (5 stages) plus a deposit drawdown.

Repayments during the construction period are interest-only on the drawn balance — i.e. you only pay interest on what's been released, not the full approved limit. This keeps holding costs low while the property generates no income or use. The loan converts to standard principal-and-interest amortisation at the final completion drawdown.

Lenders require a fixed-price builder contract (cost-plus contracts are usually rejected), builder's insurance, and an as-if-complete valuation. Most lenders cap construction LVR at 80%; some go to 90-95% with LMI for owner-occupier first-home buyers.

construction home loan · build loan · progress payment loan