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How Does Construction Financing Work?

A construction home loan is a specific type of mortgage designed for people wanting to build a new home or renovate an existing home.

Construction Home loan

While a traditional home loan releases the full funds for your property purchase at settlement, construction loans aren’t set up in quite the same way as a regular mortgage.

Instead, the lender considers the total amount you need to borrow and will release sufficient funds for the land settlement.

The lender holds the construction funds and pays the builder directly as the construction progresses throughout each stage as specified on the contract. These payments are called progress draws.

To make budgeting easier

  • While progress draws are being made, most lenders will only expect you to pay the interest on the loan amount that has been drawn.
  • Your full principal and interest payments won’t begin until after the handover has taken place and you have received the keys to your new home.

Home Constructions

Purchasing vacant land and building a home offers several advantages compared to buying an established property. However, it also comes with its own set of challenges and considerations.


Building a home on vacant land allows you to design and customise your house according to your preferences, needs, and lifestyle. You have control over the layout, materials, finishes, and overall style of the house.

Lower ongoing maintenance

New homes generally require less maintenance and repair work in the early years, as everything is brand new and built to current standards.

Energy efficiency

New construction can incorporate the latest energy-efficient technologies and building practices, potentially reducing your long-term energy costs and environmental impact.

Your progress payment schedule will typically have 6 progress milestones during the construction period.

The six steps of construction progress stages

Deposit: Stage 1

The builder will issue an invoice for 5% of total construction costs. Ideally this should be paid to builder before the land settles.

The builder can then submit the building plans for council approval as soon as the land purchase has settled.

Base/Slab: Stage 2

This stage also includes site cutting and preparation, as well as running initial plumbing into trenches and pouring the slab.

Frame: Stage 3

The building frame is finished when the wall frames, roof frames and all tie-downs and bracing are complete

 Enclosed/Lockup: Stage 4

The next stage involves works being completed such as all the brickwork, roofing and electrical fittings completed.

The windows, doors and insulation are fitted, and the property becomes physically lockable.

Fixing: Stage 5

This next stage is when the interior of the property is installed.

This involves such things as internal lining, architraves, cornice, skirting, doors to rooms, shower trays, wet area tiling, built-in cabinets and built-in cupboards of the building are fitted and fixed.

Plumbing and electrical are completed, and gutters and down pipes installed. The Kitchen and bathrooms are generally fully installed as well.

Practical Completion: Stage 6

The final stage of construction usually includes painting the home inside and out and adding those finishing touches, such as installing shower screens, towel rails and walk-in robes.

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