Everything You Need to Know About Construction Loans

What Construction Finance Actually Covers

Construction finance releases funds in stages as your build progresses, not as a lump sum upfront. You'll draw down money at specific milestones like slab down, frame up, lock-up, and practical completion. Lenders only charge interest on the amount drawn down at each stage, which keeps your repayments lower during the build.

As a plasterer, you're already across how progress payments work on a building site. Construction funding follows the same principle. The lender appoints a quantity surveyor or building inspector to verify each stage before releasing funds to the builder. That verification protects both you and the bank, making sure money only flows when work is actually complete.

Consider a plasterer building a custom home who needs to pay a deposit to secure land, then cover builder progress payments across six months. Rather than borrowing the full amount from day one, construction finance might release 10% at deposit, 15% at slab, 20% at frame, 25% at lock-up, 20% at fixing stage, and the final 10% at handover. During the slab stage, you're only paying interest on 25% of the total loan amount, not the full figure.

Land and Construction Package Versus Buying Land First

You can structure construction finance as a single land and construction package or split it into two separate transactions. A combined package means one approval, one settlement, and one set of fees. Buying land first gives you time to finalise plans and lock in a builder without pressure, but you'll need to service that land loan while also covering rent or your current mortgage.

Splitting the transactions can work if you've found suitable land but haven't settled on a design or builder yet. You settle on the land with a standard home loan, then refinance into construction finance when you're ready to build. That approach adds a second round of application and settlement costs, but it removes the pressure to commence building within a set period from the initial approval.

Lenders typically require you to start construction within six to twelve months of settling on a land and construction package. If your council plans or development application take longer than expected, that deadline can become tight. If you're buying in an area with slow council approval times or planning to do significant custom design work, buying the land first might give you more breathing room.

Fixed Price Building Contracts and Cost Plus Structures

Most lenders will only approve construction finance against a fixed price building contract with a registered builder. That contract locks in the total build cost and sets out a clear progress payment schedule. Lenders want certainty that the loan amount will actually complete the project, and a fixed price contract gives them that.

Cost plus contracts, where you pay the builder's actual costs plus a margin, are harder to finance because the final price isn't locked in. Some lenders will consider them if you're using a well-established builder and can show a detailed cost breakdown with a buffer built in, but your options narrow significantly. Owner builder finance is even more restricted - only a handful of lenders will touch it, and they'll typically cap your loan at 60% to 70% of the property's finished value.

If you're planning to act as your own builder or use subbies you know directly, you'll need a substantial deposit and the ability to prove you can manage the project through to completion. For finance for tradies working in the construction industry, some lenders will accept your trade background as evidence of capability, but they'll still want to see strong financials and a detailed project plan.

How the Progressive Drawdown Actually Works

The progressive drawdown schedule matches your builder's progress payments, but there's usually a lag. Your builder invoices for a stage, the lender arranges an inspection, the inspector signs off, then the lender releases funds. That process can take five to ten business days, which means you need to account for the timing gap when coordinating with your builder.

Some builders will wait for the bank to release funds before starting the next stage. Others expect payment within a set timeframe and will charge interest or delay the project if funds are late. Make sure your builder and your lender are aligned on timing before you start. A progress inspection fee applies at each drawdown, typically $300 to $400 per inspection, and you'll pay that in addition to your interest costs.

Lenders structure repayments as interest-only during construction, with the option to switch to principal and interest once the build is complete. That's called a construction to permanent loan. You're not required to switch lenders at completion - the loan just converts automatically. Some plasterers prefer to reassess their rate and features at completion and refinance if a better option exists, but there's no obligation to do so.

What Lenders Actually Assess on a Construction Loan Application

Construction loan applications require more documentation than a standard home loan. Lenders want to see your fixed price building contract, council-approved plans, evidence that all conditions have been satisfied, proof you've paid the builder's deposit, and a breakdown of how the total loan amount will be used. If you're buying land as part of the package, they'll also assess the land value and require a formal valuation.

Your borrowing capacity gets tested the same way as any home loans for tradies, but lenders will also check that the completed property will be worth more than the total loan amount. If you're building in an area with limited sales data or constructing something unusual, the valuer might apply a conservative estimate, which can impact your approval.

As a plasterer working for yourself, you'll need the usual self-employed documentation - tax returns, business financials, and ABN registration. Some lenders will accept a letter from your accountant or use bank statements to assess income, but construction finance is already higher risk in the lender's eyes, so they tend to be stricter on income verification than they would be for a standard purchase.

House and Land Packages and Off the Plan Options

House and land packages through a developer often come with streamlined approvals because the builder, plans, and land are all locked in. The developer might even have a preferred lender arrangement that speeds up the process. You'll still go through the same progressive drawdown, but the timeline is usually tighter because the developer wants to move quickly.

Off the plan finance works differently because you're buying a completed or near-completed property rather than funding construction yourself. The contract will specify a settlement date, often twelve to twenty-four months out, and you'll need a deposit upfront. If you're looking at house and land package loans for tradies, the main risk is that the property value at completion is lower than the contract price, which can leave you with a shortfall if you're borrowing at a high loan-to-value ratio.

With a house and land package, you're signing up for a set design and inclusions. That reduces flexibility but also reduces risk for the lender, which can make approvals faster. For plasterers who want a particular layout or custom inclusions, a standalone construction loan with your own builder will give you more control but requires more legwork upfront.

Renovation Finance for Existing Properties

If you're looking to renovate rather than build from scratch, renovation finance works on a similar drawdown model. You'll need quotes from your builder or subbies, a clear scope of works, and council approval if the work requires it. Lenders will typically advance funds in two to four stages depending on the size of the renovation, with inspections at each stage.

For minor renovations that don't require council approval, some lenders will release the full amount upfront and treat it as a standard loan top-up rather than a construction facility. That's faster and avoids progress inspection fees, but you'll need enough equity in the property to support the additional borrowing. If you're planning a major structural renovation or an extension that increases the property's footprint, expect the same level of scrutiny as a new build.

Plasterers often have an advantage with renovation finance because you can demonstrate trade knowledge and may be able to coordinate subbies directly rather than using a head builder. That can reduce costs, but as mentioned earlier, owner builder finance is harder to access and requires a much larger deposit. If you're looking at renovating your house, weigh up whether the saving from self-managing is worth the reduced loan options.

Interest Rates and Fees on Construction Facilities

Construction loan interest rates sit slightly above standard variable home loan rates because the lender is taking on additional risk during the build. Expect to pay an extra 0.10% to 0.30% during the construction phase, with the rate reverting to standard variable or fixed once the build is complete and the loan converts to a standard mortgage.

You'll also pay a few specific fees: a progress drawing fee each time funds are released, a valuation fee for the land and completed property, and sometimes a separate application fee for the construction component. Those fees add up to around $2,000 to $3,000 on top of standard loan establishment costs, so factor them into your budget from the start.

Some lenders charge interest in arrears during construction, meaning you pay interest at the end of each month based on how much has been drawn down. Others capitalise the interest and add it to the loan balance, so you're not making any repayments until construction is complete. Capitalising interest keeps cash flow easier during the build, but you'll end up with a higher loan balance at the end. For plasterers managing variable income across the build period, that flexibility can be useful, but it's worth running the numbers to see how much extra interest you'll pay over the life of the loan.

Call one of our team or book an appointment at a time that works for you. We'll take a look at your income, your plans, and what lenders are actually willing to back, then work out which construction finance structure fits your situation.

Frequently Asked Questions