Key difference: A construction loan releases money in stages as your build progresses. You only pay interest on what’s been drawn down so far. A standard home loan hands you the full amount at settlement, and repayments start straight away.
Banks won’t fund a house that doesn’t exist yet with a normal mortgage. If you’re building, you need a construction loan. The mechanics are different from what most people expect, though.
Side-by-Side Comparison
| Feature | Construction Loan | Standard Home Loan |
|---|---|---|
| How funds are released | In stages (progress drawdowns) | Full amount at settlement |
| Interest during build | Interest-only on drawn amount | Full P&I from day one |
| Loan term | Construction phase (12-18mo) then converts to standard | 25-30 years |
| Valuation | Based on plans + specs (future value) | Based on existing property |
| LVR | Typically max 80-90% | Up to 95% with LMI |
| Documentation | Building contract, plans, council approval required | Standard employment/income docs |
| Redraw during build | Usually not available | Available |
| Rate | Often slightly higher (0.1-0.3%) | Standard rates |
How Progress Drawdowns Work
Your lender doesn’t hand over $600K on day one. Instead, the money comes out in 5-6 stages that match your building contract:
| Stage | What’s Completed | Typical % | Cumulative |
|---|---|---|---|
| Deposit | Contract signed | 5% | 5% |
| Slab/Base | Concrete slab poured | 15% | 20% |
| Frame | Walls and roof frame up | 20% | 40% |
| Lock-up | Roof on, windows in, external walls | 20% | 60% |
| Fixing | Internal walls, kitchen, bathrooms | 25% | 85% |
| Completion | Final finishes, handover | 15% | 100% |
Here’s how it actually works: your builder finishes a stage, sends an invoice to the bank, and the bank sends an independent valuer out to confirm the work’s been done. Once they sign off, the bank releases the next payment. The whole cycle takes a few days to a couple of weeks depending on how busy valuers are in your area.
What You Pay During Construction — Worked Example
You’re paying interest-only on whatever’s been drawn so far. That’s the upside of a construction loan: early in the build, your repayments are small. They climb as each stage gets paid out. Here’s what it looks like on a $600,000 loan at NAB’s Base Variable IO rate of 7.09% p.a. (April 2026):
| Stage | Cumulative Balance | Monthly IO Payment |
|---|---|---|
| After deposit/slab | $90,000 | $532 |
| After frame | $210,000 | $1,241 |
| After lock-up | $330,000 | $1,950 |
| After fit-out | $510,000 | $3,013 |
| After completion | $600,000 | $3,545 → converts to P&I |
Total interest during a 12-month build: approximately $27,000 at current rates. If you’d been paying interest on the full $600,000 from day one, that figure would be around $36,500. So the staged drawdown saves you roughly $9,500 during the build. The catch? You’re not paying down any principal until the loan converts to P&I.
Rate context (April 2026): The RBA cash rate is 4.10% (raised March 2026). Average owner-occupier IO rates sit at 6.40% (RBA Lenders’ Statistics). Construction-specific loans from smaller lenders range 5.49%–10.34% (Canstar, Finder). The big 4 banks don’t charge a separate “construction rate” — they apply their standard variable rate with IO repayments during the build, which typically runs 0.50–0.90% higher than their P&I rates.
Know your numbers before you apply
Use our free calculator to estimate your total build cost — the number your lender will need.
Current Construction Loan Rates (April 2026)
The RBA cash rate sits at 4.10% after the March 2026 increase. But the rate you actually pay on a construction loan varies a lot depending on the lender and your deposit:
| Lender | Rate (Variable, IO) | Min Deposit | Notes |
|---|---|---|---|
| Horizon Bank | 5.49% | 30% | Lowest rate, but high deposit |
| People First Bank | 5.64% | Varies | No upfront fees |
| Unity Bank | 5.70% | 5% | Lowest deposit requirement |
| NAB Base Variable | 7.09% (IO) | 10–20% | Big 4; P&I converts to 6.19% |
| Loans.com.au | 6.94% (80% LVR) | 10% | Non-bank lender |
Sources: Canstar, Finder, NAB, April 2026.
One thing that trips people up: the big 4 banks don’t have a separate “construction rate.” They just use their standard variable rate with interest-only repayments during the build. And IO rates are always higher than P&I rates, typically by 0.50–0.90%. At NAB right now, that’s 6.19% (P&I) vs 7.09% (IO). So you’re paying a premium during the build, even though you’re borrowing less at each stage.
LVR: How Much Deposit Do You Need?
| LVR | Deposit Required (on $600K) | LMI? | Availability |
|---|---|---|---|
| 80% | $120,000 (20%) | No | Most lenders |
| 90% | $60,000 (10%) | Yes | Big 4 and some non-banks |
| 95% | $30,000 (5%) | Yes | Select lenders only (Unity Bank, some brokers) |
| 60–70% | $180K–$240K (30–40%) | No | Owner-builders only — most lenders cap LVR at 60–70% for owner-builders |
Source: Home Loan Experts, Finder.
Fees to Watch For
- Progress drawdown fee: $100–$200 per stage (5–6 stages = $500–$1,200 total). Some lenders waive this, so it’s worth asking upfront.
- Valuation/inspection fee: $150–$350 per inspection. That’s the bank sending someone out to physically check the work before releasing each payment.
- Conversion fee: Some lenders charge when the loan switches from IO to P&I at completion. Not all do, but it’s easy to miss in the fine print.
- Total fee impact: Budget $1,000–$3,000 in construction-specific fees on top of normal loan fees. They sneak up on you.
Construction Timelines and Approval Windows
Most borrowers don’t think about approval windows until they’re staring at one. CBA requires construction to start within 12 months of the loan contract date and finish within 24 months of the first progress payment. Most banks have similar windows. If your build runs over, you need to apply for an extension. They can say no. And if they do, you’re looking at refinancing mid-build, which is about as fun as it sounds.
What to Look For in a Construction Loan
- Interest rate — not just the rate during construction, but what it converts to afterwards. Some lenders offer a sharp IO rate and then bump you onto an uncompetitive P&I product.
- Progress payment flexibility — can you customise the drawdown stages, or are you locked into their standard schedule?
- Valuation turnaround — how long does each inspection take? Slow valuers hold up your builder, and your builder will not be happy about that.
- Fees — establishment fee, progress payment fees, conversion fee. Ask for the total, not just the headline rate.
- LVR — maximum loan-to-value ratio offered. This dictates your deposit.
- Pre-approval validity — pre-approvals expire, and the building process takes months before you even break ground.
- Builder requirements — some lenders maintain approved builder lists. If your builder isn’t on it, you may need a different lender.
What Can Go Wrong During a Construction Loan
Builder insolvency
Not hypothetical. After Porter Davis and Probuild collapsed between 2021 and 2023, thousands of homeowners were left with half-built houses and active loans. Home Warranty Insurance (mandatory in most states) covers completion, but finding a replacement builder to pick up someone else’s unfinished job typically costs 20–30% more than the original contract. Lenders now look at builder financials much more carefully before approving a construction loan, which is cold comfort if you’re already mid-build when things go wrong.
Cost overruns triggering revaluations
You decide mid-build that you want upgraded finishes, or the site turns out to have rock that needs blasting. The cost goes up. When that happens, the bank may want a fresh valuation. If the property’s assessed value doesn’t support the bigger loan amount, the gap comes out of your pocket. A fixed-price contract protects you from the builder’s cost blowouts, but anything you change yourself and anything unexpected in the ground sits outside that fixed price.
Valuation shortfall at completion
Before your first drawdown, the bank does an “as-if-complete” valuation based on the plans. But that’s a forecast, not a guarantee. When the build finishes and they value the actual house, the number can come in lower. If what you’ve spent (land plus build) exceeds what the completed property is worth, your LVR is suddenly higher than expected. That can mean paying LMI you didn’t budget for, or putting in more cash to bring the ratio down.
Approval lapse from build delays
Builds run late. It’s almost the norm rather than the exception, with 3–6 months past the scheduled completion date being common. If yours pushes past the lender’s 24-month window, you need an extension. Banks can decline. If they do, you’re refinancing mid-build with a partially completed house as security.
Common Questions
Can I get a construction loan with a 5% deposit?
Technically, yes. A handful of lenders (like Unity Bank) will go as low as 5%, but you’ll pay Lenders Mortgage Insurance, which adds thousands to your costs. Most construction loans need 10-20% deposit. If you’re a first home buyer, the federal First Home Buyer Guarantee may let you put down 5% without paying LMI, but places are limited and there are price caps.
What happens if my builder goes bust during construction?
Home warranty insurance (mandatory in most states) should cover the cost of getting the build finished. But “should” and “will” are different words. Claims take time, finding a new builder to finish someone else’s work is harder than starting fresh, and it almost always costs more. Before you sign with any builder, check that their insurance is current and adequate. Your lender will check too, but don’t rely solely on them.
Can I use my land as equity?
Yes, and this is one of the best positions to be in. If you already own the land outright, its value counts as your equity. So if the land is worth $300K and you need a $600K construction loan, you’re already at 50% LVR before putting in any cash. If you’ve still got a mortgage on the land, you can use whatever equity you’ve built up, though the maths gets a bit more complicated.
What happens when construction is complete?
The loan converts from interest-only to a standard home loan with principal and interest repayments. This happens automatically with most lenders. Some will let you pick a different product at conversion, and this is your window to negotiate or refinance. Don’t just let it roll over without checking what rate you’re landing on.
General information only. Consult a mortgage broker or financial adviser for personalised advice.
Related Guides
- Cost to Build in Melbourne — Know what you’re borrowing for
- First Home Owner Grant VIC — $10,000 grant
- Stamp Duty VIC — Save on upfront costs
- How Much to Build — National cost guide
