A construction loan funds a new build or major renovation in stages: the lender approves the total (land plus fixed-price building contract), releases money to the builder at each progress payment — slab, frame, lock-up, fixing, completion — and you pay interest only on what has been drawn. Approval depends on the land, the builder's contract and your ability to service the full amount, and the loan usually converts to a standard home loan once the final inspection is done.
This page is for people researching construction loans and related options such as construction home loan, building loan, construction finance. It explains how this type of finance generally works, who it may suit, the issues that can affect lender approval, common scenarios and the steps involved from initial review through to settlement or funding.
Every application is assessed on its own facts. Property or asset value, income, expenses, existing debts, credit conduct, entity structure and lender policy can all change the outcome. The information below is general and is designed to help you ask better questions before choosing a lender or loan structure.
Unlike a standard purchase loan, construction finance is usually released through progress payments as the builder reaches agreed milestones. Common stages include slab or base, frame, lock-up, fixing and completion. Because the full loan is not advanced on day one, interest is generally charged on the amount drawn at that point, subject to the lender’s terms.
The bank will usually review the land position, fixed-price building contract, plans, specifications and any other costs that need to be funded. Variations, upgrades, site costs and items excluded from the building contract can create a funds-to-complete shortfall if they are not identified early.
Construction lenders commonly value the property on an “as if complete” basis and may also inspect progress before releasing certain payments. If the completed valuation is lower than expected or the build cost increases, the borrower may need to contribute additional funds. A contingency buffer can therefore be an important part of the planning process.
Broker's Guide
What you need to qualify, what to have ready, where lender policies genuinely differ, and the mistakes we see most often. General information — every application is assessed on its own facts.
Scenario 1
Situation: $260k land settling in 6 weeks, $410k build contract, 12% deposit.
How we'd approach it: Single construction loan covering both, land settles first with interest only on that portion; LMI compared across two lenders as it varies significantly.
Scenario 2
Situation: Existing home with a $300k loan to be demolished and rebuilt for $650k.
How we'd approach it: Construction loan refinances the existing debt; lender needs to accept vacant-land valuation during the build; rent budgeted into serviceability.
Scenario 3
Situation: Site costs came in $35k over the contract after excavation.
How we'd approach it: Variation lodged with the lender; if the completion valuation still supports it the loan is increased, otherwise the shortfall is funded from savings — this is why we advise a 5–10% contingency.
Our Approach
We start by understanding the full scenario and what you want the finance to achieve. Depending on the transaction, our work can include:
Real Situations
Construction finance needs to fit the building contract and the timing of progress claims. Common projects include:
Step by Step
Review the land position and total project budget
Assess borrowing capacity and available contribution
Review the building contract, plans, specifications and known variations
Compare construction lenders and valuation requirements
Obtain approval before construction starts
Set up the construction facility and required contribution
Manage progress-payment requests as the build advances
Complete any lender inspections and final valuation requirements
Move the loan to its post-construction repayment structure after completion
A loan approval is only one part of the process. Derwent Finance focuses on understanding the objective, comparing lender policy and helping manage the application from initial strategy through to settlement. We assist borrowers across Australia with home loans, refinancing, investment, construction, self-employed, complex, commercial and business finance scenarios.
Where the best outcome is to keep an existing loan or wait until the borrower’s position changes, the recommendation should reflect that rather than moving a loan simply to create a transaction.
FAQs
The lender generally releases funds in stages as construction progresses.
Usually interest is charged on the amount drawn, subject to lender terms.
It depends on land value, build cost, lender and your overall position.
Potentially, subject to valuation and lender policy.
Yes, where the work is substantial enough to require staged funding.
Common requirements include the building contract, plans, specifications and builder details.
Still have questions? Speak with our team
Ready to understand your options? Book a Strategy Call with Derwent Finance. We can review your current position, what you want to achieve and which lending pathways may be available.
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General information only. Credit assistance is subject to individual circumstances and lender criteria. Interest rates, fees, lender policy, government schemes and eligibility can change without notice. This website does not provide legal, taxation or financial advice. Content last reviewed: August 2026.
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