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 of a communication breakdown and things may go wrong.

Getting approved for a building loan is half the battle with the majority of mortgage brokers and bank employees not understanding the process.

Check out this step-by-step building guide for more information.

Accept the reality and set your expectations

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, leading 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!

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.

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 the cost of construction or the on-completion value.

If you’re building an investment property, some will even consider , future rental income which can greatly improve your borrowing power.

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 and 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.

Check out the stages of construction page for more information.

Ensure each stage is complete before completing drawdown request

At each stage of the build, it’s recommended that you have a walkthrough to ensure that the property is being built to specifications and to quality.

You may want to consider hiring a building consultant so you can be sure that no corners have been cut.

This is particularly at the practical completion stage or last drawdown: don’t sign off on the last drawdown until you’re satisfied.

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?

This can add a 6-week delay to your construction and you may also be charged a premium by the builder!

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.

Your broker will 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 and construction 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 and 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 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 were borrowing a high percentage of the property value may have enough funds to complete the project but may not have enough to settle on the purchase of the land.

Each state and territory has their own incentives for both first home buyers and those building homes.

This is particularly true in recent years where expontential growth in the real estate market has forced federal and state governments to review their first home buyer grants and concessions.

We recommend that you contact your state government to confirm the incentives that you may be eligible for (you can find a link to state revenue offices on the FHOG guide page).

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 with a construction loan is particularly difficult to organise.

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 set up!

Do I need a building certificate?

The council should be approving the construction before work even commences.

It’s when buying a property that has been renovated that you should ask whether the owners (vendors) can provide a copy of the building certificate.

In that way, you can ensure the renovations were to code and you avoid the risk of council fines.

If you’re an owner builder, you’ll need to apply for Development Approval (DA) with the local council.

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 on the plans for any property purchased for the purpose of building, renovating, knocking 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 https://www.homeloanexperts.com.au/unusual-employment-loans/new-job-home-loan/ 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 https://www.homeloanexperts.com.au/guarantor-home-loans

  • 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 https://www.homeloanexperts.com.au/genuine-savings/personal-loan-deposit/

  • 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 https://www.commerce.wa.gov.au/building-commission/building-service-and-home-building-work-contract-complaints

  • 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. https://www.homeloanexperts.com.au/free-quote/

  • 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.

  • Chloe Maree Trask

    If I purchase a block of land for 400,000 and need a 40% deposit due to it being over 130acres, then in a year time I want to build a house to the value of 200k
    What kind of deposit would I need for the house loan ? How does it work, would I need a 40% deposit of the 200k or do I need to pay off a lot of the land loan ?

  • Hi Chloe,
    I’d very strongly recommend that you look for a property under 123 acres as the lending rules are much easier.
    For vacant land we can lend 80% and when you go to build we can lend 95%.
    For properties over 123 acres it’s case by case so the banks may lend 80% on the land and the house as an exception but there’s no guarantees. So you need to plan for a 40% deposit on the land and on the house as well.

  • Jon Suen

    Under a construction loan, if it is split with a separate component for the land loan – is LMI only applicable for the land loan (on settlement)?

  • Hi Jon,
    At settlement of the land you’d pay LMI on the land and then on settlement of the construction loan you’d pay LMI on that as well. That’s assuming that when you build you’re borrowing over 80% of the total cost (land and construction) of the project.

  • Coleen

    I own 3 investment properties and I want to knock down one of them and rebuild. The approximate cost of construction is right now estimated to be $1 mil. It will be a fixed price contract. I’m 60 years old so will it be a problem with the lenders to finance?

  • Hey Coleen,
    Your age would definitely be a red flag among most lenders but because your exit strategy can include selling off one of your investment properties to pay off the loan, it should be okay. You will need to inform the lender you go with on your submission notes. You can also cash out on one of the other properties to help with the loan. We have a few lenders in mind that may be able to help so please feel free to contact us on 1300 889 743 if you’d like to discuss it with an expert construction loan specialist.

  • Angela

    My land will be settling in October and then construction will begin immediately. How long are pre-approvals valid for? What about providing up-to-date payslips?

  • Hi Angela,
    Pre-approvals are generally valid for a period of 3 to 6 months depending on the lender. Regarding up-to-date docs, lenders can request for updated payslips and statements if they are more than 6 weeks old.

  • Latimore

    Hi, me and my wife are both Aussies. She’s right now in Australia but I’m working in Qatar and earn in Riyal. We own vacant land of around $180k value and we want to build 2 units for $350k. Our main debt right now would be $450k owing on a house valued at $600k where my wife is currently living. Will we be okay to borrow?

  • Yes Latimore, you should be okay to borrow with a few lenders. We will need to find a lender that can accept the Qatar Riyal and finance construction of multiple units. Please call our overseas number +61 2 9194 1700 or have your wife call our office on 1300 889 743 to discuss everything with an expert mortgage broker.

  • snew61

    Hi, we have recently purchased a block on which we plan to build our retirement home. We took a 100k mortage on our home (valued at 500k) to buy land that is valued at 140k. In 4 years time we plan to build a house, shed etc for about 500k… not sure until we get a better understanding on the costs. We will probably owe about 50k on the mortgage by then and have some savings. About how much could we expect to get as a maximum construction loan. We are both 55 and government employed. Thanks

  • Hi
    You have sufficient equity to get the construction loan for the full $500,000 that you’re after. It’s just a question of your income, expected retirement age & if you are selling your current home or not.
    Overall I’d say that if you’re both working full time in the government you should be ok on all of the above. You can use this calc to see if your income is sufficient for the loan you’re after https://www.homeloanexperts.com.au/how-much-can-i-borrow/

  • Markey

    I need to borrow 45% of $1 mil to renovate and finish off building a property. My credit is good but I can only provide an accountant’s declaration. Around half that amount is to finish off the building (insides gutted to renovate). I need help to secure this finance.

  • Hey Markey
    From the sounds of it, it seems we will need a desktop valuation because the insides of the property and because you can only provide an accountan’s dec, it will be low doc. Although the low LVR at 45% is good, banks may generally not accept desktop valuations on construction and renovation projects such as this and even if you want to do a cashout, it may not be possible without BAS statements because of the size of it. We have a few solutions in mind and we can further find alternatives after we have your full info and details so please call 1300 889 743 to discuss it with an expert construction loan specialist.

  • Raiden

    I need a construction loan for land and construction. My scenario is if I have the valuation of the property “As If Complete” at $660,000 from A bank.
    Would I be able to borrow 80% of the valuation: $528,000
    Cost of Land ($280,000) and Construction ($230,000) is: $510,000
    Cost of quotes to complete the house: $40,000
    In my scenario would the bank allow to draw down the full amount of $528,000
    and then I contribute the rest of the amount: $22,000 plus stamp duty for the land.
    My question is would that be doable if I only want to contribute the amount to complete the house and not have to pay for mortgage insurance?
    Would the bank expect the 20% of $660,000: $132,000 amount to be contributed first or do I only contribute $22,000 to complete the home at the end?
    My idea is to put all the savings into the offset account against the loan and contribute only $22,000.
    Would the bank allow to drawn down the land $280,000 for land and drawn down the $248,000 for construction and pay the remainder $22,000 out of my pocket to complete the house at the end?

  • Hi Raiden,
    If you contribute $22k then the lending will remain at 80% so no insurance. All the contributions will need to be made upfront. Lenders will forward the payment only after your contribution is made. Lenders can allow $280k drawdown for land but for construction, the client contribution should come out first.

  • Kerri

    I would like to know if being a beneficiary of a will that will be enough to pay off a home loan entirely is a satisfactory exit strategy for a 53yo?

  • Mark M

    I have a project in Wallsend, Newcastle to purchase land for 690k with
    one existing house on it that will be renovated and sold immediately for
    approximately $600k, thus reducing the initial loan to only 90k. On the
    rest of the land I have a DA approved in April 2017, to build another
    similar size house which will also sell for around $600k. I will need to
    borrow about $150 to do the build. Once I have taken out development
    costs and paid back all bank loans + agency commission fees I have
    calculated a gross profit of between $200 – $220k.

    I do not have any cash, but I do have my home that I own outright worth about $500k.
    Has anybody any ideas on lenders who would be willing to consider this ?
    Thank you for your help,

  • Hi Kerry,
    Different lenders have different policies regarding exit strategy so yours may be acceptable to a few lenders depending on how risky or realistic they consider it.

  • Hey Mark M,

    Note that development loans are assessed on a more stricter basis these days. However, some lenders may consider the property you own outright even if you don’t have any cash. Another option can be to cash out from the property and use it to help with the finance.

  • Ben K

    I’m a first home buyer and looking to use the first home buyers grants available. Im looking to buy an apartment off the plans which is estimated to be built mid 2018 to the value of $450k in QLD. Based off credit and income I’d qualify for said loan with no issues. I understand the grant is payable upon settlement. However to my question, Is it possible to use the grant as part of my deposit through a construction loan or something similar?

    So for example if the required deposit is $40k, and I have $20k cash; is it possible to use the $20k grant in that payment as a construction loan or any other means.

    Thanks in advance

  • Hi Ben,
    Buying off the plan is actually a lot higher risk than it looks. Please read this page https://www.homeloanexperts.com.au/property-types/off-the-plan-units/ and talk to your conveyancer before signing a contract. A lower risk way to get the grant is to buy a property that’s new but is already complete (as opposed to being built in the future).
    If you buy an apartment off the plan in VIC then the grant will be available at settlement. So you cannot use it as a deposit at the time you sign the contract but you can use it towards the total funds required to complete the purchase. I hope that makes sense!

  • Brenda Keane

    I am a first home buyer. I earn $80000 gross p.a. I have just paid off all my credit card debt but have a car loan on which I owe &15000. I want to get a house & land package in Regional Bendigo. I will get the first home owners grant of $20000. My age is 53. Will my age go against me? I am young and fit for my age and expect to work until I am at least 67. I will have about $10.000 in savings soon.

  • Hi Brenda,
    You’ll need to be able to afford the loan over a 14 year loan term to be successful. On an income of $80,000 that may be possible just depending on the price of the property you buy & build. There’s some info on retirement age policies here https://www.homeloanexperts.com.au/home-loan-articles/retirement-age-home-loan/

  • Faith Lois

    I am a first home buyer and I’m interested in building. I am currently looking at house and land packages, but unfortunately the total loan amount requires me to put down a hefty deposit which I cannot afford at the moment.

    What are the drawbacks of buying a land first and build later? I was told by the builder that the bank might undervalue the land and will have to come up with the purchase price and real land value difference. Is this true?

    Apart from on going costs like council rates and water rates for the vacant land (if I were to delay building), are there any other drawbacks?

    Do people generally buy their land first and build later, or do it as a package?

  • Hi Faith,
    The main disadvantage is that you’ll be paying rent and a mortgage at the same time if you buy the land now. If you can afford it then I wouldn’t see it as a problem for the valuation.
    The valuation will only be an issue if you pay too much for the land or construction. This is actually quite common as ‘new’ properties often involve a premium price. Whereas existing properties tend to be a little cheaper.
    Most people buy land and then build relatively soon afterwards.
    If the deposit size is your main concern then consider a guarantor loan https://www.homeloanexperts.com.au/guarantor-home-loans/

  • Faith Lois

    Thanks. Sorry, I just edited my post and mentioned that I am not in a hurry to build as I am paying a small amount of rent to my parents.

    The one I’m interested in is $345k for land and $180k for building (within 20km from city). What are the chances that the vacant land valuation by the bank will be less than the purchase price if I were to buy the land first?

  • Hi Faith,
    We can’t really be sure of the valuation. I’d recommend that you make an offer on the land subject to finance and then it can be valued by the bank before you commit to buying the property. If the valuation comes in low you can use the ‘subject to finance’ clause to cancel the contract. Your conveyancer can assist you to put this in the contract.

    If you’d like our assistance with a loan then just call us on 1300 889 743 and ask for Raul our construction specialist.

  • Faith Lois

    I’ve made an offer to the seller and have 3 weeks to get final approval. Can the bank do the land valuation before the 3 weeks is over? Or does the valuation usually happen on settlement?

  • Yes the valuation can be done now as long as the settlement of the land is within 3 months. If you contact Raul he can organise this quite quickly.

  • Nathan Ding

    I have quite a complicated scenario to run past you. My parents currently own their house outright. They plan to knock down the existing house, subdivide the land into 2 lots (front and back) and then build 1 townhouse on each lot. My parents are gifting me the front lot where I will build my townhouse.

    My parents have enough cash to pay for their own townhouse outright plus some. Whereas I will require a construction loan to finance mine. This is the tricky part…subdivision has been approved and we are waiting for the relevant authorities to provide letters to the council so we can receive the statement of compliance so our conveyancer can transfer the front lot into my name.

    Right now, the builder plans to start building before I have the title in my name. There may be a few months where construction has begun, however my parents are happy to help finance my townhouse while I am waiting for my construction loan.

    Do you foresee any issues with the bank (namely CBA) paying the original invoices that my parents have already paid? (The builder will credit my parents for their future invoices). Or do you have any advice for our particular situation?


  • Hi Nathan,
    Please do not start building until your construction loan is approved! Few lenders will accept a partially built house as security. You can potentially get a formal loan approval now, start building, transfer the land into your name (and settle the loan) and then the bank will pay drawdowns as per normal. The issue is when the construction has begun before your loan is assessed.
    CBA is relatively good with construction loans however their pricing isn’t great. If it’s a home to live in then there’s much better pricing from other lenders. I’ll email you and cc our construction specialist and they can provide a quote to you if you like. We’d also need to confirm with the lender that you can commence construction prior to settlement of the loan. I expect it will be ok as we’ve done a few in the past however it’s rare so it’s always best to check.

  • Nathan Ding

    Thanks for your reply. However, I thought a bank won’t give me a loan unless the title of the land is under my name? Or are there some exceptions?

  • They can approve the loan now but not advance the funds until the property is in your name

  • Andy


    I have a question about a project involving a house on land we are looking to demolish and subdivide. the lender we are looking to use has requested that we get insurance on the existing home and provide evidence before a facility can be approved. This seems absurd as we are going to knock it down. I would imagine this will void any existing building insurance. In fact, the existing insurer has indicated they cannot insure a house intended for demolision. Seems reasonable to me.

    Is this lender confused? Are they referring to builders insurance to cover the construction phases?


  • Hi
    Yes they’re confused. In most cases it’s easier to just get the insurance and cancel it later when construction begins. However you can provide the builders insurance instead and try to argue with them. This will cause delays.

  • Andy

    Thanks a million. That has really set my mind at rest. So builders insurance will cover any damage to properties through the building phases?

    Thanks again

  • Usually standard insurance covers it up to construction starting. Maybe pay by the month to avoid extra costs. Then once construction starts it’s the builder’s insurance that covers the incomplete dwelling. When complete you’ll need to get insurance again.

  • Matthew


    We currently have a home loan with 210000 remaining house valued around 300000. We plan to build a kit home with a licensed builder at the back of the block and then strata title. Our current gross salary is 140000. We will need to borrow the full amount. Are we looking at two loans or can it be done in one construction loan.

  • Hi Matthew,
    The kit needs to be purchased up front in cash which is the main hurdle for this type of construction. Based on the cost of most kits this wouldn’t be feasible. Would it be possible to do a standard construction loan (i.e. not a kit)?

    As you already own the land you can do this as one loan instead of two loans.

  • Zoe

    I would like to borrow $2.8 mils at 80% LVR to build a house in a city area. The land is $1.5 mils and the construction will cost $1.2 mils. I currently owe $1.05 mils on a mortgage but I can prove my income to show that I can afford them. Are your brokers able to help me through this?

  • Yes, our mortgage brokers are capable to secure your home loan. You’ll need to either have $100k in cash, assuming the valuation is $2.8 mil, or you’ll need a guarantor. It would be best if you can get a guarantor and then consider a few lenders that we already have in mind. Please call 1300 889 743 or simply enquire online to discuss in detail with an expert:

  • Duilio

    I would like to buy a property and then build on it. The price is $275k and the construction cost is $300k. I have a $125k deposit and an unencumbered property of $700k to help. Income isn’t an issue but the lease is expiring in 5 years and I’ll only be extending the lease to 40-50 years once the first stage of construction is completed. Will your broker be able to assist me through this?

  • Hey Duilio,

    Yes, though please note that the bank may change policy and may not want to commit to the future construction stage. To counter this, you can purchase an existing property instead. Please call 1300 889 743 to discuss your situation and loan needs in detail with one of our expert mortgage brokers. Or simply, place an online enquiry and one of us will contact you in 24 hours:

  • shamesL

    I would like to borrow for construction on the land that I had bought previously , I still owe 80% on the land . I have 10% for the construction phase ( $50000 ) . Can I avoid LMI somehow or can I use the equity on the land as deposit ? What the best strategy to get construction loan in my situation . Thx in advance

  • Hi Shames
    Potentially if your land went up in value then you may be under 80% LVR on the final value. If you bought in Sydney or Melbourne a few years ago this may be the case.
    However you could consider a guarantor loan https://www.homeloanexperts.com.au/guarantor-home-loans/ and that would avoid LMI. Or if you are a doctor, lawyer or accountant you may get waived LMI https://www.homeloanexperts.com.au/waived-lmi/
    If none of this will work then we can try to find a lender for you who has cheap LMI and who has a low rate even if you borrow over 80% of the property value.

  • Ellen Delforce

    I am looking at building a new home next to old house on our property then do a knock down of the existing house. We own the existing house and the 100 acres out right.
    The land was valued at $300k and we would like to build the house for $320k how does this work with a construction loan?

  • Hi Ellen,
    This would be fairly straightforward. We would value your property on an ‘on completion’ basis which would usually be the current value plus the cost of the house. However that depends on the condition of your existing house but overall you have plenty of equity so you will be fine.
    You don’t have enough equity to just have the funds released to you, so it will be a normal construction loan where the bank releases the funds to the builder in stages as the house is built. This is pretty simple to organise. I’ll email you and cc our construction loan specialist and they can answer any other queries that you have.

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  • Melissa Jayde

    When do you start making mortgage repayments?
    What happens when a builder goes into administration?

  • Hi Melissa,
    You would start making repayments about a month after the loan is advanced.
    If the builder goes into administration then the Home Warranty Insurance is relied upon. Your insurer would appoint a new builder and they would complete construction.

  • Melissa Jayde

    When would the loan be advanced? Does that happen when the first payment is made to the builders or on settlement?

  • Hi Melissa,
    The land loan settles when you buy the land. The construction loan has repayments that commence when the builder is first paid and they increase as the construction loan is advanced to the builder in stages. When the house is complete you’ll have the full repayments on the construction loan.

  • Michael

    Hi, we are trying to organise a construction loan and everyone seems in a rush. Our land titles March next year but we are still in discussions with builders as to the final house plan. Do we need to sign the builder contracts before securing land loan, can we add a preset building budget now to secure land or do we need to sign builder contracts now? I don’t want to be rushed into a design we want to tweak and be charged for changes, we still have 4 months before land even titles. Seems a bit like a trap to me

  • Hi Emmy
    It’s usually for a maximum of 90% – 95% of the land value plus the building contract price. E.g. land is $100,000 and construction is another $100,000 then it is valued at $200,000 and you can borrow up to $190,000. Many lenders limit construction loans to 90% of the property value however a few can do 95% construction loans.

  • Hi Michael,
    It is a risk to sign the building contract before securing land loan. Also, you have to pay for any changes in the contract and each change have to be communicated to the bank. As it’s a long way for the land to get titled; so it’s prudent to wait till March. However, you could proceed now for the land loan and once the land is titled, you move with the construction loan.
    You can call us on 1300 889 743 or enquire online https://www.homeloanexperts.com.au/free-quote/ and one of our mortgage brokers will work out the best way to structure your loan.

  • Baboon

    I am having my home constructed by a professional builder and have my base laid and slab stage completed. However, the expenses have been more than what was provided to us by the builder previously. Will the bank lend us the additional funds required?

  • Hi Baboon,
    This is a very tough situation to be in, in terms of the lender’s perspective. There are various possibilities, depending on your 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 may accept this.
    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 borrowed amount must remain under 80% of the property value.