The short version
A construction loan pays your builder in stages as the work is done, rather than in one amount at settlement. The lender pays a stage only once it is complete, and you generally pay interest only on the amount drawn so far. When the home is finished, the loan usually rolls into a standard principal and interest home loan.
Progress payments: how the build is paid for
Building contracts set out stages, and state law limits how much a builder can ask for at each. In Victoria the law sets both the deposit and the stage payments for a contract to build all stages:
| Stage | Share of the contract price | Complete when |
|---|---|---|
| Deposit | Up to 5% (contracts of $20,000 or more) | On signing |
| Base | 10% | Footings and slab (or floor structure) complete |
| Frame | 15% | Frame complete and approved by the building surveyor |
| Lock up | 35% | External walls, roof, flooring, external doors and windows fixed |
| Fixing | 25% | Internal linings, doors, cabinets, fixtures fitted |
| Completion | The balance (10%) | Practical completion and handover |
Before each payment, the lender usually sends a valuer or inspector to confirm the stage is done, then pays the builder directly once you authorise it. Check the work has passed the building surveyor's inspection and matches your contract before you sign off.
Your money goes in first
Lenders generally require your own contribution (your deposit, plus any part of the cost the loan won't cover) to be used before they start funding stages. So if the land and build cost more than the loan, the gap has to be paid early, not at the end. That is the single most common surprise on a build.
What you pay during construction
While the home is being built you usually pay interest only on the drawn balance. Repayments start low (interest on the land, if the land was financed) and rise with each stage. If you are renting at the same time, budget for rent and rising interest together for as long as the build takes, and allow for delays.
What lenders look at
- A fixed price building contract with a licensed builder, plans and specifications. Contracts with large provisional sums or prime cost allowances make lenders cautious, because the final cost isn't known.
- An 'as if complete' valuation: the valuer values the finished home from the plans. The loan is based on that value, so if it comes in below the land plus build cost, you fund the difference. See new build valuations.
- Your ability to repay the full loan once it is fully drawn, assessed like any other home loan with the 3 percentage point buffer.
- Builder's insurance. Home warranty or building compensation insurance is required by law above set thresholds in most states.
Risks to plan for
- Variations. Changes after signing add to the price and usually need your lender's approval and your own funds.
- Delays. Weather, supply and approvals can stretch a build, which means more months of interest and rent.
- Builder insolvency. Check the builder's licence and insurance before you sign, and never pay more than the law allows in advance.
- Cost above the valuation. If the finished home is valued below what it costs, the lender lends on the lower figure.
Common questions
Do you pay principal and interest during construction?
Usually not. Most construction loans charge interest only on the amount drawn while the home is being built, then switch to principal and interest when it's finished.
Can I get a First Home Owner Grant on a build?
Yes, in every state except the ACT, if you meet the conditions. The grant is for new homes, and building one is the main way first home buyers qualify. Amounts and value caps differ by state: see first home buyers.
How much deposit do I need to build?
Lenders' requirements are similar to buying, but your own money usually has to go in first, and you also need to cover stamp duty on the land and any cost above the valuation. The Borrowable check works out the cash you need.
Sources
- Consumer Affairs Victoria: deposits and payments for building work, checked 21 October 2026
- NSW Fair Trading: contracts for residential building work (deposits, insurance), checked 21 October 2026
General information only, not credit advice. It doesn’t take your objectives, financial situation or needs into account. Rules and figures change; check them, or talk to Joshua, before you rely on them.