--- title: "Construction Loan vs Home Loan — Key Differences" description: "What's the difference between a construction loan and a regular home loan? How progress drawdowns work, interest during build, and what to look for." source: HomeBuildBudget sourceUrl: https://homebuildbudget.com/guides/construction-loan-vs-home-loan lastUpdated: 2026-06-16 citationUrl: https://homebuildbudget.com/guides/construction-loan-vs-home-loan --- # Construction Loan vs Home Loan — Key Differences What's the difference between a construction loan and a regular home loan? How progress drawdowns work, interest during build, and what to look for. What's the difference between a construction loan and a regular home loan? How progress drawdowns work, interest during build, and what to look for. Quick answer: A construction loan releases funds in 5–6 stages (progress drawdowns) as your build progresses — you only pay interest on what’s been drawn down so far. A standard home loan pays the full amount upfront at settlement. Construction loans typically charge 0.50–0.90% higher interest rates (IO during build), require 10–20% deposit (vs 5% for standard loans), and need your building contract, plans, and council approval before the bank releases a cent. At current rates, staged drawdowns save roughly $9,500 in interest on a $600K 12-month build versus full drawdown. Updated April 2026 based on RBA and lender data. 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. Your lender doesn’t hand over $600K on day one. Instead, the money comes out in 5-6 stages that match your building contract: 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): ## How Progress Drawdowns Work ### What You Pay During Construction — Worked Example ### Know your numbers before you apply ## Current Construction Loan Rates (April 2026) ### LVR: How Much Deposit Do You Need? ### Fees to Watch For ### Construction Timelines and Approval Windows ## What to Look For in a Construction Loan ### Builder insolvency ### Cost overruns triggering revaluations ### Valuation shortfall at completion ### Approval lapse from build delays ### Can I get a construction loan with a 5% deposit? ### What happens if my builder goes bust during construction? ### Can I use my land as equity? ## Key Points - 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. - 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. - Construction loans release funds in 5–6 stages, saving approximately $9,500 in interest on a $600K 12-month build versus full drawdown ## Frequently Asked Questions ### 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. ### 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. --- *Source: [HomeBuildBudget](https://homebuildbudget.com/guides/construction-loan-vs-home-loan)*