When to Use Construction Finance for Custom Homes

Construction finance releases loan funds in stages as your custom home gets built, not as a lump sum at settlement.

If you're building a custom home rather than buying an existing property, you need a loan structure that matches the way builders get paid. A standard home loan releases the full amount at settlement, which doesn't work when you're paying a registered builder in instalments over six to twelve months. Construction finance solves this by releasing funds progressively as each stage of the build is completed and inspected.

How Progressive Drawdown Works

The lender releases funds in instalments that align with your progress payment schedule. Each time your builder completes a stage—such as slab pour, frame completion, or lock-up—they submit a claim. The lender arranges a progress inspection, and once the work is verified, the next payment is released directly to the builder. You only pay interest on the amount drawn down so far, not the full loan amount.

Consider a software developer purchasing suitable land for $400,000 and signing a fixed price building contract for $650,000. The lender approves a total loan amount of $840,000 at 80% of the combined land and construction cost. At settlement, only the land cost of $400,000 is drawn. Three months later, when the slab is completed, the builder invoices for 15% of the contract value—around $97,500. After inspection, that amount is released. The borrower pays interest only on the cumulative $497,500 drawn to that point, not the full $840,000.

Fixed Price Contracts and What Lenders Require

Most lenders require a fixed price building contract with a registered builder before they'll approve construction funding. The contract must include a detailed scope of work, a progress payment schedule, and a completion timeframe. Lenders use this document to assess whether the project is viable and whether the loan amount covers the full build cost plus a buffer.

Lenders also require council approval and stamped plans before the first drawdown. If your development application is still pending, the lender may issue conditional approval but won't release funds until all permits are finalised. Some lenders also require you to commence building within a set period from the disclosure date, typically six to twelve months.

Interest-Only Repayment Options During Construction

During the construction phase, most borrowers opt for interest-only repayment options. You're charged interest only on the amount drawn down, which keeps repayments lower while you're still paying rent or a mortgage elsewhere. Once the build is complete and you move in, the loan typically converts to principal and interest repayments over the remaining term.

This structure is particularly useful if you're selling an existing property and timing the settlement to coincide with the build completion. You avoid paying full principal and interest on a loan for a home you're not yet living in.

Cost Plus Contracts and Owner Builder Finance

If you're using a cost plus contract instead of a fixed price agreement, fewer lenders will consider the application. Cost plus contracts don't have a locked-in total price—you pay the builder's costs plus a margin—which creates uncertainty for the lender. Similarly, owner builder finance is only available through specialist lenders and typically requires significant experience in construction or project management.

For most software developers building a custom home, a fixed price building contract with a registered builder is the most efficient path to approval. It removes pricing uncertainty for both you and the lender, and it gives you a clear progress payment schedule to plan around.

What You'll Pay in Fees

Construction loans include a Progressive Drawing Fee, typically between $200 and $400 per drawdown. If your build has five drawdowns, you'll pay this fee five times. Some lenders cap the total fee or include a set number of drawdowns in the upfront costs.

The construction loan interest rate is usually similar to a standard variable rate, though some lenders charge a small margin during the construction phase. Once the build is complete, the loan converts to a standard home loan, and you can refinance or negotiate a lower rate if needed. You can read more about getting a lower interest rate after your build is complete.

Land and Construction Packages

If you're purchasing a land and construction package, the structure is similar but often more streamlined. The developer has pre-existing relationships with lenders, and the contract terms are standardised. Lenders treat these as lower risk because the builder has completed the same design multiple times, and the costings are well understood.

You can explore how house and land package loans differ in structure and approval requirements if you're comparing a package deal to a fully custom build.

Approval Timelines and Income Assessment

Lenders assess your income the same way they would for any home loan, but they also evaluate the build contract and the builder's credentials. If you're a software developer with a mix of base salary and equity compensation, the lender will want to see how your income is structured and whether it's stable enough to service the loan during construction and after conversion to principal and interest.

Approval can take longer than a standard home loan because the lender's credit team needs to review the building contract, council plans, and progress payment schedule. Allow an extra week or two for this process. For more detail on how lenders assess non-standard income structures, see understanding your income.

When Construction Finance Converts to a Standard Loan

Once the build is complete and you receive a certificate of occupancy, the lender conducts a final valuation. If the completed home is valued at or above the contracted amount, the loan converts to a standard home loan with principal and interest repayments. If the valuation comes in lower than expected, the lender may require you to bring additional funds to settlement or adjust the loan terms.

This conversion happens automatically in most cases. The lender will notify you of the new repayment amount and the date it takes effect, usually within a few weeks of practical completion.

Call one of our team or book an appointment at a time that works for you to discuss how construction finance fits your build timeline and income structure. We work with lenders across Australia who understand how to assess custom home projects and can structure the loan to match your drawdown schedule.

Frequently Asked Questions