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What Is a Construction Loan?
A construction loan is a specialised mortgage designed to fund the staged costs of building a home. Unlike standard home loans, construction loans release funds at different stages of the building process, rather than providing a lump sum upfront.
How Construction Loans Work
Construction loans operate on a progress payment system, meaning funds are released in stages as the build progresses. Borrowers only pay interest on the amount drawn, rather than the full loan amount. Lenders typically structure payments into five or six key construction stages, including site preparation, foundation, framing, lock-up, and completion. Once construction is finished, the loan may convert into a standard home loan with principal and interest repayments.
Benefits of a Construction Loan
Construction loans provide flexibility by allowing borrowers to only pay interest on the funds used during each building phase. This helps manage cash flow and reduces financial pressure while construction is ongoing.
Additionally, staged payments ensure builders receive funds when needed, preventing delays in construction. Lenders also conduct progress inspections before releasing funds, ensuring the build stays on track and meets quality standards.
Expert Construction Loan Brokers & Lender Comparisons
At Freedom Mortgage Solutions, we work with over 30 lenders to find the best construction loan rates and repayment options. We help borrowers navigate lender requirements, ensuring a smooth approval process and timely fund releases.
Tailored Loan Solutions for New Builds & Renovations
Every construction project is unique, and so is its financing. Whether you're building your first home, developing an investment property, or funding major renovations, we tailor loan solutions to match your needs. Our specialists handle the paperwork, lender negotiations, and approvals, so you can focus on your build.
Stages of a Construction Loan
Construction loans follow a structured progress payment schedule, with funds released as building milestones are completed. The common stages include:
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Slab or Base Stage – Covers site preparation and laying the foundation.
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Frame Stage – Funds for framing, including walls, windows, and roof structure.
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Lock-Up Stage – Covers external walls, roofing, and doors/windows.
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Fit-Out Stage – Funds internal fittings, electrical, plumbing, and flooring.
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Completion Stage – Final payments for finishing touches and handover.
Understanding these stages ensures a smooth financing process and a well-managed budget during construction.
Who Can Apply for a Construction Loan?
Construction loans are available to owner-builders, first-home buyers, property investors, and renovators. Lenders assess an applicant’s income, deposit, credit score, and building plans when approving a loan.
Applicants need to provide council-approved building plans, a fixed-price building contract, and a licensed builder agreement. Our mortgage specialists guide you through these requirements to ensure a fast and hassle-free loan approval process.
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FAQ
A construction loan differs from a standard mortgage as funds are released in stages rather than as a lump sum. Borrowers only pay interest on the amount drawn, making it more cost-effective during the building phase. Once construction is complete, the loan may convert into a standard home loan with full principal and interest repayments.
Most lenders require a minimum deposit of 10-20% of the total construction cost. The exact amount depends on the lender’s policies, your financial profile, and whether you qualify for government grants like the First Home Owner Grant (FHOG). Some lenders may allow low-deposit construction loans, but additional conditions may apply.
Yes, construction loans can be used for major home renovations, extensions, or knockdown rebuilds. However, small renovations may be better suited to a home equity loan or personal loan. The best option depends on the project size and loan amount needed. Consulting with a mortgage expert helps determine the most cost-effective financing solution.
Most lenders allow some flexibility for unexpected delays, but it’s essential to communicate any changes with your lender and builder. If significant delays occur, loan terms may need to be adjusted. Having a well-structured contract and contingency plan helps prevent funding issues during construction.
Yes, some lenders offer owner-builder construction loans, but these typically have stricter requirements and higher deposit expectations. Lenders may request additional proof of construction experience, a detailed building plan, and cost estimates. Working with a mortgage broker ensures you find a lender that accommodates owner-builder projects.
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