First home buyers
Grants and duty concessions, including those only available on new builds.
Construction Loans
A construction loan pays your builder in stages as the house goes up, and you pay interest only on what has been drawn. It behaves differently to a standard home loan in almost every respect.
Rather than advancing the whole amount at settlement, the lender releases funds in progress payments as each stage of the build is completed and inspected. You pay interest only on the balance drawn so far, so repayments start small and rise as the build progresses. Once the build finishes, the loan converts to a normal principal and interest home loan.
The five standard progress payments
Almost every fixed-price residential build in New South Wales follows the same sequence, and your builder's contract will set out the percentage attached to each stage.
- Slab or base. Foundations poured and the base laid.
- Frame. Frame erected and approved, roof trusses in place.
- Lock-up. External walls, windows and doors in, so the building can be secured.
- Fit-out or fixing. Internal fittings, cabinetry, plasterwork and tiling.
- Completion or practical completion. Final finishes, site cleaned, ready to occupy.
Before each payment the lender sends a valuer to confirm the stage is genuinely complete. They pay the builder directly rather than paying you, which protects both you and them. It also means an invoice can sit unpaid for a week or two while the inspection is arranged, so it is worth telling your builder early which lender you are using.
What your repayments do during the build
Because you are only charged on the drawn balance, repayments begin low and step up after each drawdown. On a typical build you might start paying interest on a small fraction of the loan and finish paying interest on all of it.
The important part is what happens at the end. When construction finishes the loan converts to principal and interest over the remaining term, which is a substantial jump from the final interest-only figure. Budget for the converted repayment, not the interest-only one. Our repayment calculator will show you what the loan costs once it converts.
Most people are paying rent at the same time. You are covering somewhere to live while also servicing a rising construction loan. Lenders assess your capacity on the converted repayment, but your own cash flow has to survive the overlap. Plan for the build running longer than the contract says.
Buying land and building
If you are buying a block and building on it, this is usually financed as two connected parts: a loan to settle the land, then a construction facility drawn down as the build proceeds. Some lenders handle this as one application, others as two.
If you already own the land outright, its value counts towards your equity, which often means you need far less cash than you expect. This is one of the more common pleasant surprises in construction lending.
Stamp duty is payable on the land, not on the completed house, which is why building can be cheaper in duty terms than buying an established home of equivalent value. First home buyers should also note that the vacant land thresholds under the First Home Buyer Assistance Scheme differ from the thresholds for houses. Our NSW stamp duty calculator handles both, and the first home buyers page covers the grant, which is available on new builds where it is not available on established homes.
What lenders want from your builder
The lender is assessing the builder as much as they are assessing you. Expect them to want a fixed-price contract from a licensed builder, full council-approved plans and specifications, builder's insurance under the Home Building Compensation Fund, and a schedule of progress payments that matches their own drawdown structure.
Owner-builder projects are considerably harder to finance. Fewer lenders will consider them, the loan-to-value ratios offered are lower, and the documentation burden is heavier. It is possible, but it is a narrow field of lenders and worth establishing at the outset rather than after you have committed.
Variations are the other common friction. If you change the scope mid-build, the contract price changes, and the lender has to reassess. Variations funded outside the contract usually come out of your own pocket, because the loan was approved against the original fixed price.
Where construction loans go wrong
Three things account for most of the trouble we see.
The build runs over time. Construction facilities have an expiry, commonly around twelve months, after which extensions must be requested. Delays are normal; not planning for them is the problem.
The final valuation comes in under the contract price. If the completed house values below what it cost to build, the lender may not release the final payment in full, leaving a gap you have to cover. This is more likely on unusual designs or in areas with few comparable sales.
The builder fails. Home Building Compensation Fund cover exists precisely for this, and it is why lenders insist on it. It is not a reason to avoid building, but it is a reason to check the cover is genuinely in place before the first payment goes out.
How we help
Lenders differ sharply on construction: how many drawdowns they permit, how quickly they inspect and release, whether they will fund owner-builders, and how they treat land you already own. Those differences affect your build far more than a small difference in rate.
We compare more than 60 lenders, match you to one whose drawdown process suits your builder, and stay involved through the progress payments rather than disappearing at settlement. Our service costs you nothing and is disclosed in our Credit Guide.
Common questions
No. During the build you pay interest only on the amount drawn so far, so the repayment starts small and rises with each progress payment. It converts to full principal and interest once the build is complete, which is the figure to budget against.
Yes. If you own the block outright its value counts as equity, and many people find they need little or no additional cash as a result. If the land still has a loan against it, the available equity is what remains beyond that debt.
Construction facilities carry an expiry date, often around twelve months. Extensions can usually be arranged, sometimes with a fee. Tell us as soon as a delay looks likely rather than close to the deadline, because extensions are far easier to arrange in advance.
It is possible but much harder. Fewer lenders participate, they typically lend a lower proportion of the value, and they require more documentation. Worth establishing which lenders will consider it before you commit to the approach.
No. In New South Wales duty is assessed on the land you buy, not on the completed dwelling, which is why building can cost less in duty than buying established. First home buyers should check the vacant land thresholds, which differ from the house thresholds.
Building? Get the lender matched to your builder
Drawdown speed and inspection process matter more on a build than the rate does.
Related
NSW stamp duty calculator
Duty on vacant land and on established homes, at current rates.
Purchase costs calculator
Everything you need upfront beyond the deposit itself.