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Construction Loan Tips

When do I actually apply for the building loan?

Why are construction loans so complicated?

Building a home is a complex process that involves multiple parties including builders, contractors, lenders, solicitors, accountants, quantity surveyors and the council. With so many people involved in the process, there’s always the possibility that some experts won’t understand each other’s field and things may go wrong.

It can also be exceedingly complicated to obtain finance. The majority of mortgage brokers and bank employees don’t understand construction at all!

As a result, construction loans are often set-up with many errors. The loan amount may be incorrect or it may be delayed, due to constant amendments.

We have created this guide to help you ensure that you don’t have these same frustrations with your construction mortgage.

Your expectations are the key

Each lender processes a loan in a particular manner. With a conventional loan, it’s often easy to have the loan submitted and approved in a timely manner. For a construction loan, this system is often poorly designed and run by inexperienced staff within the banks.

Loan documents are commonly lost and credit officers often lack communication skills. This can lead to misunderstandings and delays.

Our job as your mortgage broker is to fix these issues as they arise, and where possible, prevent them from occurring in the first place.

No matter which lender you apply with, you’ll need to have some patience!

How do construction loans work?

When you apply for a loan, the lender will need a copy of the building contract/tender and the plans. They’ll ask their valuer to estimate the on-completion value of the property and will assess your loan on the lesser of the land price plus cost of construction or the on-completion value.

Once your loan has been approved, the lender will issue a loan offer for you to sign and return, just like with any other home loan. When your builder is ready to begin receiving payments from the bank he’ll need to provide additional documents, such as the final council approved plans, his insurance & drawdown schedule.

How do you request that the bank pay your builder directly?

  • The builder will send you an invoice.
  • You’ll then complete and sign a drawdown request form (available from your lender).
  • Send the drawdown request form and the invoice to the construction department of your lender.
  • The lender may require a valuation to confirm the work that has been completed so far.
  • The funds will be advanced to your builder generally within five working days.
  • Repeat this process for each progress payment required by the builder.

You can check out the stages of construction page for more information.

Changes to the building contract

Did you know that if you make an amendment with the builder and the contract price changes by just $100, the lender may need to reassess the loan all over again?

So how can you avoid changes causing a problem with your home loan?

  • Make sure that the building contract you provide the lender with is the final complete contract.
  • If you make any small changes then try to pay for them from your own funds, or have the builder reimburse you for any discounts after construction is complete.
  • For any large changes, you’ll need to notify the bank and then allow up to one month for the bank to reassess your loan.
  • “Keep it simple” works very well with the banks! If you keep making changes then expect to have significant delays.

Other minor quotes

It’s quite common for people to hire contractors to complete other work such as landscaping, utility connections, swimming pools or site works.

Try and get all of these minor quotes included in the building contract and then have the builder pay for them.

This may not work for the builder, so discuss this with us and your builder before deciding on the best way to go.

Sometimes the banks will only release funds for other quotes on completion of construction. Be careful because you may have agreed to pay the contractor up front!

One loan or two?

If you’re buying the land, you may want to consider splitting the loan into a “land loan” and “construction loan”, which means that they’ll be advanced at different times.

If this isn’t done then you’ll need to put all of your required funds in at the time the land settles. Any LMI will be charged at land settlement.

We’ll discuss this with the lender to confirm their process and find out when you’ll be required to contribute your deposit.

Please call us on 1300 889 743 or free assessment form and one of our mortgage brokers will work out the best way to structure your loan.

How big of a deposit do I need?

Most people go over budget!

We recommend that you keep saving during the construction process and try to avoid any large expenses until construction is complete.

As a general rule, we try to ensure that you get approval for a slightly higher loan amount.

This is to ensure that there are plenty of funds available.

There’s nothing worse than running out of funds when your house is almost complete!

If you’re borrowing 100% of the cost of land & construction as with a family pledge home loan (guarantor loan), then you’ll still need some funds on standby to allow the builder to create the building contract & apply for council approval.

This is because the lender can’t release funds outside of the specified construction drawdowns.

Additional work completed by contractors

In some cases, part of the work isn’t being completed by your builder.

Some common examples are:

  • Swimming pool
  • Pergola
  • Driveway
  • Power pole / power connection
  • Landscaping
  • Site clearing
  • Shed, dam or other hobby farm improvements

If you can provide a formal written quote for this work then we can often get the bank to extend the loan for these costs.

It really depends on the nature of the work and the lender that we’re working with as to whether this will be possible or not.

The key is to give us this information at the beginning of the process!

If you tell us about the additional work later on then we can’t get the lender to finance it.

Be careful as some lenders will only release money for the additional work once the main house is completed. This may not suit your construction schedule and so in some cases we need to change to another lender.

Are you paying cash?

If your builder is being paid cash for their work then no lender can approve a construction loan for you. They can only approve a loan based on the current value of your property.

We recommend that you always sign a formal contract with your builder, ensure they have the correct insurances in place and follow all relevant state and federal legislation.

First Home Owners Grant

The First Home Owners Grant (FHOG) is paid to the lender by the government when the first drawdown is made to the builder.

This means that many people who’re borrowing a high percentage of the property value, may have enough funds to complete the project, but may not have enough funds to settle on the purchase of the land.

Each state & territory has their own incentives for both first home buyers and those building homes. We recommend that you contact your state government to confirm the incentives that you may be eligible for.

We’ll always complete a “funds to complete calculation” for the land and for the total project to make sure you have enough money to complete both stages.

Guarantor loans

The combination of a guarantor home loan with a construction loan is a particularly difficult situation. Most lending systems simply can’t handle this combination and as a result there are delays and errors.

Please discuss this with us as we have a couple of lenders that can accept this type of loan!

Do I need a building certificate?

Find out whether or not you need a building certificate by checking out our Do I Need A Development Application (DA)? page.

Cost plus / variable cost construction loans

In some cases, you may not be able to determine the total cost of construction before your loan is approved so you can apply for a Cost plus / variable cost construction loan. This type of loan is based upon the plans for any property purchased for the purpose of building, renovation, knock down or rebuilding.

We are construction loan specialists!

Our mortgage brokers are specialists in construction loans. We can quickly work out which lenders can approve your loan. In addition to this, we can structure your loan in a way that ensures that your new home is built without the hassles.

Please call us on 1300 889 743 or fill in our free assessment form and one of our mortgage brokers will assist you in getting approval for a construction loan.

  • Sarah

    I am having my home constructed by a professional builder, and have my base laid out and slab stage completed. However, the expenses had been more than what was provided to us by the builder before. So, how can we claim the extra money, will the bank lend us the additional funds required?

  • Hi Sarah,

    This is a very tough situation to be in, in terms of the lenders perspective. There are various possibilities, depending on the situation.
    1. Discuss with your current lender if they can accept the additional costs to be added onto the loan amount, i.e. if you had initially borrowed less than the maximum the lender accepts.
    2. If this does not work, you could possibly refinance your incomplete property and go to a lender that accepts this as security and lends you the required amount. The total lending however should still remain under 80% of the property value.

  • Emmy Burrell

    Is the construction loan normally 80-95% of the land value or contract value?

  • Hi Emmy,

    With a construction loan you can borrow up to 95% of the land value and also up to 95% of the contract to build the house.

    E.g. land is $500,000 and house costs $500,000 then you can borrow 95% of $1m ($950,000).

    In some cases the bank valuer will assess the end value to be less or more than the cost of construction. In these cases the bank would lend 95% of the lesser of the cost or value.

    E.g. with the above example if the bank valuer’s assessment of the end value was $900,000 then they would lend 95% of $900,000 and if the end value was $1.1m they would lend 95% of $1m.

  • Emmy Burrell

    Is that with all banks?
    I’m with Westpac.

    What’s the minimum %? Is it 80%?

  • Hi Emmy,

    The banks vary with construction loans. Some decline all constructions loans, some lend 80%, some 90% , some 95%. With a guarantor loan you can borrow 105%.

    With Westpac there is no minimum, you can just borrow as much as you need. It’s recommended to have a buffer in most cases as the cost of construction often goes over the expected amount.

    FYI we can do loans with Westpac and also get you quotes from other lenders as well. Feel free to call our brokers on 1300 889 743 if you’d like to compare your options. In most cases our services are free and we get often put in a pricing request to get better rates than you can get directly.

    Best of luck with your project.

  • bec

    my husband and I want to renovate – add bedrooms, deck etc to our existing home. It is valued at approx $400k and we only have a $40k mortgage. The renovation/construction is under $150k but we would like to refurnish as well. Is there any other loan available instead of a construction loan? we already have the equity

  • Hi Bec,
    We have a few specialist equity loans that can give you the money so that you can spend it as you want rather than having the bank control the funds and pay your builder in draw downs. That means if you want you can pay contractors directly rather than having a builder and as a result it’s usually a fair bit cheaper. This only works if you have a lot of equity, thankfully you’re in a good position so this should be fine.

    Please call us on 1300 889 743 and ask for a broker who is a specialist in equity loans.

  • bec

    Excellent, thank you. I have already spoken with someone and they have sent me some information.

  • Great thanks Bec happy to help. Make sure the new deck has a spot for a BBQ ;)

  • Aplin630

    I’m self-employed and need $420k to build on $350k land that’s an hour or so away from a regional capital. I can provide accountant’s letter as well as income declaration but nothing else.

  • Hello Aplin630, we have a lender in mind that may be able to allow you to borrow up to 75% of the property value considering your situation. Please call 1300 889 743 to discuss this with an expert construction loan specialist.

  • Daniela

    Hi, what happens if I lost my job before settlement date? Are they gonna cancel my approved home loan?

  • Hi Daniela,
    In some cases yes and others no.
    The majority of lenders will not be aware of you losing your job between unconditional approval and settlement. If you tell them they will withdraw the approval. If you don’t tell them then likely the loan would proceed.
    Some lenders check your employment after they unconditionally approve your loan. In this case you may have your approval withdrawn. This is approx 20% of lenders.
    If you only had a preapproval and had not yet found a property then in most cases you need to provide new payslips when you find a property. So we’d recommend that you look for a new job quickly. Some lenders don’t accept people who have been in a job for a short period of time so you may need to change lenders.
    If you aren’t sure what type of approval you have then ask your mortgage broker if you have a preapproval or unconditional approval.
    Best of luck!

  • Wendy Achterberg-Benasa

    Hi, we have been told that we can get a loan for land with having a 5% deposit so if the land was $300 000 we need $15 000.Then when we are ready to build a house. We just need a further 5% of the construction cost so if it’s
    $300 000 then we need another $15 000. Is this true? We are also first home buyers.

  • Hi Wendy,
    Yes this is true however it is a little risky.
    Construction has a lot of unforseen costs and also sometimes the valuation comes in low.
    You’d expect a $300,000 land ply $300,000 construction to be valued at $600,000. But if they value it at $570,000 then you’d need an additional $30,000 to complete the purchase.
    4 out of 5 of our customers who build a home regret building. It’s actually a very stressful experience. If you’re after the grant then buy a newly completed home and you avoid the headaches and risk but you get the same benefits!

    I’d strongly recommend that you buy an existing home and go for a guarantor loan instead so you don’t have to pay LMI

  • Wendy Achterberg-Benasa

    Ok, thanks. Unfortunately we are unable to do a guarantor loan. One of the reasons for building is also because of my business, I run a Family Day Care and we are after the right layout. Any other suggestions would be great.

    If that is the case and they value it lower, wouldn’t we be able to just borrow the extra or how does that work?

  • Wendy Achterberg-Benasa

    If we bought a new build wouldn’t we have to come up with a higher deposit also?

  • Hi Wendy
    A new build would require the same deposit as a construction loan. Just it would be all in one go not in two parts.
    The bank lends 95% of the land + construction cost OR valuation, whichever is the lesser. So you couldn’t just borrow the extra funds except with a personal loan which you would need a high income to qualify for

  • Danni79

    If you own the land then do you need a deposit for the construction loan or does the land act as the deposit. I.e. Our land cost $450k we are putting in the $400 then will probably need a loan for the remaining $50k plus $450 for the house, pool etc.

  • Hi Danni,

    Some lenders can consider up to 80% of your land equity for a construction loan. You’ll need to provide the lender with a valuation of the land (at your own cost) and mention how long ago you purchased it. If you have a valuation already, lenders may still require another valuation depending on how recently it was done. Please check out the land equity construction loan page for more info:

  • Danni79


  • RachelP

    Hi, my partner and I decided to build in WA mid year 2016, we paid a deposit to the land developer and a deposit to the building company. Unfortunately I was made redundant just before finance approval and we were unable to proceed. The deposit was returned from the developer however, the builder told us as they had started work on the plans we aren’t entitled to the deposit back and they could potentially charge us more for anything over and above the amount of the deposit. We were led to believe that everything was subject to finance, the builder has told us that we have a $2000 credit with them for when our financial circumstances change! Can they do this?

  • Hi Rachel,
    Sorry to hear about your situation. I’m not an expert in building contracts so I’d recommend that you speak to the WA Dept of Commerce

  • RachelP

    Hi, thank you for your response I’ll make contact with them.

  • Krishna

    Hi, We’ve paid the 10% deposit towards the land and are ready to settle next month (with the LMI, unfortunately). It is a home and land package (split contracts), so we’ve also paid 5% towards the construction. The question I have is, if we borrow only 80% of the construction amount to avoid the LMI, are we allowed to pay the remaining 15% towards the end of the construction? That will give us considerable time to save and also avoid LMI?

  • Hi Krishna
    If you borrow 80% of construction then you’ll still pay lmi if the land loan plus construction loan add up to be over 80% if the final value.
    So 90% on the land and 80% on the house may work out to be 85% which means you’d pay lmi still.
    You must pay your funds up front. The bank wont release construction funds until you’ve contributed your deposit.

  • Megan Milner

    Hi, we have bought land and a build contract both on 5% deposit, and will be looking for a 95% loan (+LMI of course) when the land titles approx. Oct/Nov. Our builder does not do any landscaping and we are wanting to put in a pool – can we get the cost of the pool and other landscaping included into the mortgage loan, or will we have to take out a separate personal loan for this? We are concerned the lender may think we have over-capitalised as the suburb is still developing…

  • Hi Megan,
    It will all depend on the valuation. In particular in some areas pools don’t add value e.g. in Sydney they tend not to whereas in QLD they are very popular.
    You’ll need a formal quote for the pool and landscaping and these can then be included with the building contract when you apply for formal loan approval. If the valuer doesn’t agree then unfortunately you will need to come up with the cash or a personal loan.

  • Aimee Gaye

    Hi we are first home buyers and we have already paid 2k for reservation, 3,500 for tender and deposited 5% of the building contract. Our land contract will also need 5% deposit. With all these money already spent, will we still need another 5-10% to borrow construction and land loan to the bank? Or will they accumulate all the payments we did as the bank deposit?

  • Hi Aimee,
    The bank looks at the land price plus the cost of construction and then lends you up to 95% of that amount. You will need to put in funds to cover the difference as well as other costs such as stamp duty (if applicable). The reservation, tender and 5% deposit for the building contract will all count towards this.
    If you’re using us as your mortgage broker we can complete a funds to complete calculation and let you know how much you need to contribute.

  • Howard

    Hi, we have found a home that needs some serious work inside (replacing most walls and ceilings) it also needs a new kitchen and all the bathrooms are currently non existent. We have estimated approx $50,000 in repairs on top of purchase price of approx $250,000. Once complete the house is potentially worth upwards of $500,000. What is your advice regarding loans that will give us access to enough money to buy the home plus repair costs, thanks

  • Franz

    How does a land and construction loan work? I plan to go for a pre-approval for the entire amount (land + build). I’d need to gain formal approval for the land just after it registers and settles, while maintaining the pre-approval for the construction while soil tests are carried out prior to the issue of a building contract and other documents required for a construction loan.

    Is this how it’s usually done?

  • Hi Franz
    We get a formal approval for the land and have a second application which is a preapproval for construction.

  • Franz

    Does that require two credit checks?

  • Yes it will. However the effect on your credit score would be negligible. They factor in things like multiple applications with the same bank.

  • Franz

    So the pre-approval on the land and house doesn’t necessarily need to translate to a loan for a land & house right? It’s just indicative of how much we could theoretically borrow and then go ahead with formal approval for the land first and then the house after?

  • That’s right. You can discuss all of this with your mortgage broker on the phone and they should be able to explain it well. It’s hard to discuss this on a forum.

  • Nadean Love

    Hi. We own 100 acres. We built a shed on it which we live in currently to5al value approx $500k. We have our house plans already. Our problem is that we have a $200 000 business loan and most lenders do not know how to deal with it. I run the business and my husband is on a good income why is it soo hard to get a loan to build the house?

  • Hi Nadean
    I’m assuming that you have the $200,000 business loan secured on your home and you have no other debt?
    Some lenders can refinance a business loan to home loan rates and add back the interest you have been charged when assessing your income (e.g. $90,000 taxable income and $10,000 was paid in interest means your assessable income is $100,000).

  • CS

    We are building a new home and are obtaining finance from the bank. We bought the land last year and it got settled in November. We paid 20% deposit for the land and will be paying the same for the house (construction). We signed the contract with the builder and will be paying 5% to them in the next few days and working with the bank to get the construction loan approved. We already had a pre-approval before we bought the land.

    What I need to understand is, since a construction loan works differently to a normal home loan, who do I pay the remaining 15% to (since we will be paying the 5% to the builder directly). Also, assuming the contract price of the house is $420k do I need to have the 20% in my account before the construction starts or before the last payment is drawn down by the builder? We think we might have a shortfall of around 10-15k and the valuation might come in lower than what the builder is quoting us. Since the bank is not paying the $420k upfront to the builder my assumption is that we need to show 20% in the account before the last payment is drawn down. Any help is appreciated.

  • Hi CS
    You pay the 15% remaining to the builder. You can then provide the paid invoice to the bank and then they will authorise their funds to be paid to the builder in stages for the rest of construction. You need to contribute your 20% first before the bank puts in their funds and you need to prove it up front before they will issue the formal approval for your construction loan.
    Depending on the bank you may be able to show funds from another source e.g. a gift / loan from family to complete the construction project. You can then pay your family member back when you have the funds available.
    Be careful as construction usually goes over budget! If the valuation comes in low then talk to us as we can order valuations with other lenders for free and see if another lender can help you to borrow a little more.

  • Jess

    Is a construction loan as good as having performance and bank guarantees in place?

  • Hi Jess,
    They’re separate products for separate purposes. A construction loan is to pay for construction whereas a bank guarantee is only to guarantee that somebody can or will pay an amount later. They’re not interchangeable.