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Construction Loan Guide: Building Loan Tips and Costs Explained

Updated: Oct 8

Explore construction loan tips, interest rates, and fees to finance your new build or renovation with this comprehensive guide.

Construction loan financing guide with interest rates and fees for building and new build loans

Construction Loan Application Requirements


Applying for a construction loan involves more documentation than a standard home loan. Lenders need to ensure the project is feasible and the builder is qualified. Key documents you may need to provide include:


  • Building contract (ensure it includes an exit clause based on financing)

  • Builder's license and insurance details

  • Building plans and specifications

  • Quotes for additional works (e.g., landscaping, pools)

  • Council approvals

  • Quantity surveyor report

  • Soil tests and engineering reports

  • Any other lender-specific requirements


Having these documents ready will streamline the approval process for your construction loan and help you avoid delays.


How Much Can You Borrow with a Construction Loan?


When applying for construction financing, lenders assess the project’s future value, which makes the process more complex than a typical mortgage. Typically, construction lenders will offer:


  • 70% of the estimated build value for most borrowers

  • Up to 80% to 95% for professional builders or those with strong financial backing


It’s important to speak with your broker to determine the specific borrowing amount you may be eligible for based on the construction loan interest rates and your financial profile.


How Does a Construction Loan Work?


A construction loan operates on a progress payment schedule, meaning funds are disbursed in stages as the construction progresses. Both your builder and lender will agree on the payment schedule, typically aligned with these milestones:


  • Block clearance: Demolition and site preparation

  • Slab: Laying the foundations

  • Framing and brickwork: Structural work

  • Lock-up: Roof, doors, and windows installed

  • Fit-out: Interior fixtures and fittings, including plumbing and electricals

  • Completion: Final touches, site clean-up, and handover


These payments ensure that funds are only released as each stage is completed, which minimizes the lender’s risk and helps you manage cash flow.


Understanding Construction Loan Fees and Charges


Construction loans come with various costs that differ from traditional home loans. Some common construction loan fees include:


  • Upfront administration fees: Typically up to $1,000

  • Progress payment fees: Around $100 per disbursement

  • Monthly service fees: Some lenders may charge higher monthly fees instead of progress payment fees


When comparing loan offers, it’s important to consider these additional charges to ensure your loan fits within your budget. Working with a broker can help you find the best construction loan interest rates and minimize fees.


Insurance for Construction Projects


Lenders usually require you to have certain types of insurance in place before approving a building loan. Whether you’re working with a licensed builder or acting as an owner-builder, these insurance policies are designed to protect against unforeseen circumstances. Typical insurances include:


  • Construction works insurance

  • Public liability insurance

  • Home insurance

  • Personal accident and injury insurance


This insurance coverage ensures you’re financially protected during the construction phase.


Interest-Only Payments During Construction


One advantage of a new build loan is that during the construction phase, you only pay interest on the funds disbursed. This lowers your repayments initially, helping to manage cash flow while the building progresses. Once the project is complete, the loan will transition into a standard mortgage where both principal and interest repayments begin.


Conversion to a Traditional Mortgage


After the construction is completed, your loan will automatically convert to a traditional mortgage. At this point, you will begin making regular principal and interest payments according to the terms agreed upon with your lender. This process is seamless and ensures your financing continues smoothly once the building work is finished.


 

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Is a construction loan right for you?


Talk with one of our business finance experts who can guide you through the process and help find the best solution tailored to your needs.


Call us on (02) 8313-8400 or request a call back.


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