Construction loans
A construction loan pays for a new home in stages as it's built, rather than in one lump sum. The lender pays your builder at each stage, usually five, after checking the work is done, and you pay interest only on the amount paid out so far. Once the home is finished, the loan becomes an ordinary home loan. You'll need a licensed builder, a fixed-price contract and council-approved plans before the money starts to flow.
The five progress payments, and what triggers each
This is one lender's standard schedule, and you can check your builder's contract against it before you sign:
Slab or foundations: 20%
of the contract price.
Frame: 20%.
External walls and roof (enclosed): 30%.
Lock-up and internal linings: 20%.
Practical completion: 10%.
Before each payment, the lender usually sends a valuer to confirm the stage is done. Lenders worry about contracts that ask for more money than the work completed, because if the builder fails part-way, you've paid for work that isn't there.
Can you get a construction loan?
A licensed builder. Both lenders whose policies we've read refuse owner-builders outright.
A fixed-price contract, signed, with the payment schedule in it. Some lenders also want a fixed term.
Council-approved plans before the first payment. Submitted plans can be enough for approval.
Your own money first. Firstmac spends your contribution before it pays any stage from the loan.
Not a kit or demountable home. Some lenders won't lend for them.
What you pay while it's being built
An illustration, not a client file. You owe $300,000 on the land and sign a $500,000 build contract. During the build you pay interest only on what's been drawn, at an illustrative 6.5% a year.
| After this stage is paid | Paid to the builder | Owed in total | Monthly interest |
|---|---|---|---|
| Slab | $100,000 | $400,000 | about $2,167 |
| Frame | $100,000 | $500,000 | about $2,708 |
| External walls and roof | $150,000 | $650,000 | about $3,521 |
| Lock-up | $100,000 | $750,000 | about $4,063 |
| Completion | $50,000 | $800,000 | about $4,333 |
Once the home is finished and the loan switches to principal and interest over 30 years, the repayment would be about $5,057 a month at the same rate. If you're renting while you build, you're paying rent on top.
Buying land first, then building
Most people building buy the land first. Lenders usually want the building contract in place when they lend for the land: Firstmac funds vacant land only with a fixed-price building contract at application, as one construction loan. When the land settles, a small part of the contract can be paid to the builder as their deposit. Firstmac allows up to 5% of the contract, or 6.5% in Western Australia.
There's another route at some lenders: a standard loan, with no progress payments, if the loan is no more than the land's value and 80% or less of it, provided a licensed builder is engaged.
Is construction loan interest tax deductible?
On a home you'll live in, no. On an investment property, not while it's being built. Since 1 July 2019, the ATO says the costs of holding vacant land, including loan interest, generally can't be claimed, and land under residential construction stays "vacant" until the home is lawfully able to be occupied and is rented or available for rent. In practice that means after the occupancy certificate. How this applies to you is a question for your accountant.
Cost overruns and variations
The lender lends against the contract price. Variations and overruns usually come out of your pocket, and the lender will want them paid before the next stage is released. Firstmac goes further: it keeps back enough to finish the build as its own valuer estimates it, whatever your contract says. If its valuer thinks the job will cost more, you fund the gap first.
Leave a buffer above the contract price, and avoid variations you can't pay for in cash.
If the builder goes under
This is the event people fear most. Payments are tied to completed stages so that, if a builder fails, you haven't paid far ahead of the work. That's why the payment schedule matters, and why lenders look hard at contracts that front-load payments. If it happens, your loan stays in place; what's been drawn stays owing; and the job has to be finished by a new builder, usually at a higher price. Each state runs a home building insurance or warranty scheme for this situation; check what your contract and your state's scheme cover before you sign.
If the build runs late
Lenders set a clock. Firstmac's construction period is 12 months from settlement, and if the home isn't finished by then it adds 0.50% a year to the construction rate. On a $600,000 build that's about $3,000 a year for running late. Some lenders police the start instead: building must begin within 3 months of the loan settling. Delays are common, so ask your builder for a realistic timeline and plan for it running over.
The rules that catch people out
Less borrowing than a standard loan. Some lenders lend up to 80% for construction, against 95% on their standard loans, measured on the lower of the finished value and the cost to build.
Big loans, big builds. On loans above $1.5 million, some lenders limit the build to half the loan.
No splits or redraw during the build at Firstmac.
Investors need a turnkey contract at Firstmac; owner-occupiers can finish the driveway and landscaping themselves.
An occupancy certificate is needed before the final payment.
Building a granny flat, or renovating?
A granny flat has its own page. A renovation can also be treated as a construction loan when the lender relies on the finished value.
Construction loan questions
The lender pays your builder in stages as the home is built, usually five, and you pay interest only on what's been paid out. When the home is finished, it becomes a standard home loan.
Planning a build?
Tell me about the land, the builder's contract and price, what you have saved, and whether it's a home or an investment. I'll tell you which lenders suit the build, what they'll need, and what you'll pay while it goes up.
You'll hear back within the hour in business hours, and by 9am the next business day after hours.
Sources
- 1
One lender's residential home loan credit guidelines, construction section (the lender isn't named). Read 27 August 2026.
- 2
Firstmac, Residential Lending Policy, section 18.2 (construction), changelog to 28 July 2026. Read 27 August 2026.
- 3
ATO, Deductions for vacant land after 1 July 2019 (updated 22 June 2026). Read 2 October 2026.
- 4
The illustration: Money Brain's arithmetic on the stated example (6.5% a year, illustrative).
Updated 2 October 2026