Why Knockdown Rebuild Loans Need a Different Approach

A knockdown rebuild requires you to own or settle on land before demolition begins, then fund construction through progressive drawdowns as each stage completes.

Most lenders treat knockdown rebuilds as construction projects rather than standard home purchases, which changes how they assess your income, serviceability, and deposit. The loan splits into two phases: land acquisition and construction funding. You'll pay interest on the land component from settlement, then additional interest only on drawn construction funds as the build progresses. This structure gives you flexibility around timing but requires careful planning around when to trigger demolition, how to manage accommodation during the build, and how council approval timelines affect your finance pre-approval window.

For software engineers working with variable income structures including RSUs, bonuses, or contracting arrangements, understanding how lenders assess serviceability during construction becomes important. Construction loans require you to service both your current accommodation costs and the new loan simultaneously until the build completes and you move in.

How Progressive Drawdown Changes Your Repayment Structure

You only pay interest on funds the lender has released to your builder at each construction stage, not the full loan amount from day one. A lender releases funds at specific milestones such as slab completion, frame stage, lockup, fixing, and practical completion. Until a stage is reached and inspected, that portion of your loan sits undrawn and you pay no interest on it. Each drawdown requires a progress inspection, usually arranged by the lender, before funds release to the builder.

Consider a software engineer purchasing an older property in an established suburb for the land value, planning to demolish and rebuild. The land component settles first at $650,000, with a construction contract for $450,000. From land settlement, interest accrues on $650,000. Once the slab is poured and inspected, the lender releases the first construction drawdown of around $90,000, and interest begins accruing on $740,000 total. By lockup stage, around $270,000 has been drawn, with interest now applying to $920,000. The remaining $180,000 draws down progressively through fixing and completion stages.

This structure means your repayments increase gradually rather than jumping to the full loan amount immediately. Most lenders offer interest-only repayment options during construction, switching to principal and interest once you move in. Each drawdown also attracts a Progressive Drawing Fee, typically between $200 and $400 per inspection, which either gets added to the loan or paid upfront.

Fixed Price Contracts vs Cost Plus Arrangements

Lenders strongly prefer fixed price building contracts for knockdown rebuilds because they limit funding risk and make serviceability assessment predictable. A fixed price contract locks in the total build cost before construction starts, with variations only permitted for changes you request in writing. The contract should specify the progress payment schedule, including how much releases at each stage and what defines completion of that stage.

Cost plus contracts, where you pay the builder's actual costs plus a margin, introduce variability that most mainstream lenders won't accept for construction finance. The loan amount can't be confirmed upfront, which creates problems for both pre-approval and drawdown management. If you're considering an owner builder approach or engaging trades directly, funding becomes significantly more restricted. Only a small number of specialist lenders will consider owner builder finance, and they typically require larger deposits, charge higher interest rates, and apply stricter serviceability criteria.

A fixed price building contract should itemise exactly what's included in the build, particularly around site costs, services connection, driveways, landscaping, and fencing. Items excluded from the building contract still need funding, either from your own savings or by increasing the overall loan amount. Development application costs, demolition, temporary accommodation, and council fees all sit outside the building contract but form part of the total project cost.

Council Approval Timelines and Pre-Approval Windows

Most lenders issue construction loan pre-approval for 90 days, though some extend to six months depending on your circumstances. You must have council approval and a signed fixed price building contract before the lender will issue formal approval and document the loan. If your council approval takes longer than your pre-approval window, you'll need to reapply, and any changes to interest rates or lending policy in the interim will apply to the new assessment.

In areas with high development activity, council approval for a knockdown rebuild can take anywhere from 8 to 16 weeks depending on whether your design requires a development application or qualifies as complying development. If you're purchasing land with an existing dwelling that you plan to demolish, you can start the DA process immediately after contracts exchange, which brings approval closer to settlement. Coordinating this timeline with your construction loan application means engaging your builder and broker early, ideally before you've even made an offer on the land.

Some lenders require you to commence building within a set period from the loan disclosure date, typically 12 months. If demolition and construction haven't started within that window, the loan offer lapses and you'll need to reapply under current policies and rates. For software engineers managing variable income or planning around vesting schedules, this timeline pressure can affect how you structure deposits and when you trigger each stage.

How Lenders Assess Your Income During Construction

Serviceability for a knockdown rebuild includes your current rent or mortgage, plus interest on the full construction loan amount, even though you won't actually pay that much until the build completes. Lenders assess whether you can service the peak debt position throughout the construction period while still paying for accommodation elsewhere. If you're living in the existing dwelling before demolition, some lenders will allow you to offset that saved rent against the serviceability calculation, but only until demolition begins.

For software engineers with income including base salary, RSUs, and annual bonuses, lenders apply different treatment depending on your employment structure. Ongoing RSUs that vest regularly can be included at varying percentages depending on the lender, typically between 80% and 100% of the average vested amount over the past two years. One-off sign-on bonuses or retention payments won't usually count toward construction loan serviceability unless they're already received and sitting in your offset account as genuine savings. You can read more about how different income components are treated in our guide on understanding your income.

If you're contracting or working for a startup with equity-heavy compensation, expect more limited lender options and potentially higher deposit requirements. Construction loans already represent higher risk for lenders due to the progressive funding structure, so adding income complexity on top narrows your choices. Some lenders who accept contractors for standard home purchases won't extend that policy to construction lending.

Land and Construction Package Timing Considerations

If you're purchasing a house and land package from a developer where the land isn't titled yet, the finance structure changes slightly. You can't draw down land funds until the title issues and settles, which might be months after you sign the contract. Your construction loan pre-approval needs to remain valid until land settlement, then stay current through the council approval period, then extend through the construction phase. This can push the total timeline out to 12 to 18 months from initial contract to moving in.

Some developers offer turnkey packages where land and construction are bundled and titled land is available immediately. These packages reduce timeline risk but limit your design flexibility. The builder is usually locked in as part of the package, and while the contract will be fixed price, you'll have less room to negotiate variations or engage your own trades for specific elements.

For software engineers considering a knockdown rebuild as a way to enter an established suburb at a lower total cost than buying a completed home, the timing flexibility can be valuable. You can secure the land at today's price, take time to refine the design, and stage construction to align with your income position and accommodation needs. Just account for the interest cost on the land during the construction period when comparing total project cost to purchasing an existing dwelling.

Deposit and Genuine Savings Requirements

Most lenders require a 20% deposit for knockdown rebuild projects to avoid Lenders Mortgage Insurance, though some will lend at 90% or 95% with LMI applied. The deposit applies to the total project cost, which includes land, construction, and associated costs like demolition, council fees, and professional fees for architects or engineers if required. Some lenders calculate the deposit against land and construction separately, requiring 20% of the land value and 20% of the construction contract.

Genuine savings refers to funds you've held in your own accounts for at least three months. RSUs that have vested and been held as cash or stock for more than 90 days will generally satisfy genuine savings requirements, as will bonuses received and retained. If you're planning to sell an existing property to fund the deposit, that equity doesn't always count as genuine savings unless it's been sitting in your account for the required period. More detail on this is available in our article on using RSUs and bonuses as genuine savings.

Some lenders assess construction projects more conservatively than standard purchases, which can mean higher deposit requirements for applicants with shorter employment tenure, contracting arrangements, or complex income structures. If you've recently switched employers, even within the same industry and at a higher salary, the lender may require a larger deposit or apply a discount to your income until you pass probation. We cover this in more detail in our guide on job switching.

What Happens If the Build Runs Over Timeline or Budget

A fixed price building contract should protect you from cost overruns caused by builder delays, material price increases, or construction errors. If the builder takes longer than the agreed timeframe, you'll pay additional interest during the extended construction period, but the loan amount shouldn't increase. However, if you request variations to the original design or specifications after construction starts, those costs either come from your own funds or require an increase to your loan amount, which means a new serviceability assessment.

If the builder encounters unexpected site conditions such as contaminated soil, rock, or poor ground stability, the contract should specify whether these are the builder's risk or yours. Items genuinely outside the builder's control may trigger variation clauses, which means additional costs not covered by the original loan approval. Holding a contingency buffer of 5% to 10% of the construction contract value in accessible savings helps manage these situations without needing to renegotiate your loan mid-build.

Call one of our team or book an appointment at a time that works for you to discuss how your income structure, deposit position, and project timeline affect your construction loan options for a knockdown rebuild.

Frequently Asked Questions