Top tips to prepare for a construction loan

What you need before applying for construction finance

Before a lender will approve construction finance, they need to know exactly what you're building, who's building it, and whether the numbers stack up. That means having your council-approved plans, a fixed price building contract, and documentation from your registered builder ready before you lodge the application.

The approval process for a construction loan takes longer than a standard home loan because the lender is assessing both your ability to service the debt and the viability of the project itself. They'll want to see that the build can be completed within budget, that your builder is properly qualified and insured, and that the property will be worth more than the total loan amount once finished.

In Murrumbeena, where blocks are often subdivided or older homes demolished to make way for modern family builds, getting council approval can take anywhere from a few weeks to several months depending on the design and whether there are any overlays or objections. The lender won't issue a formal approval until that council stamp is on the plans, so starting the DA process early is one of the most useful things you can do to keep the timeline on track.

Council approval and registered building contracts

You'll need a council-approved development application and a signed fixed price building contract from a registered builder. The lender will check that the builder holds current insurance and that the contract price aligns with the property valuation they commission.

Consider a buyer knocking down a weatherboard on a standard Murrumbeena block to build a two-storey family home. They've engaged an architect, received council approval, and signed a fixed price contract for the build. The lender orders a valuation based on the plans and contract price, and the valuer confirms the completed property will be worth enough to support the total loan amount. Without the fixed price contract, the lender can't assess whether the project is financially viable, and without council approval, they can't be sure the build is even permitted.

If you're planning to use an owner builder arrangement, expect the process to be more involved. Most lenders either don't offer construction loans to owner builders or require a much larger deposit and evidence of relevant building experience. It's not impossible, but it does narrow your options.

How lenders assess your income and deposit

Lenders assess construction finance the same way they assess any home loan when it comes to your income and expenses. They'll calculate your borrowing capacity based on your household income, existing debts, and living costs. The difference is that they'll also factor in the interest-only repayment period during construction, when you're only paying interest on the amounts drawn down rather than the full loan.

You'll generally need a deposit of at least 10% of the total project cost, which includes both the land (if you're buying it) and the construction contract price. Some lenders will go lower with lenders mortgage insurance, but that adds to your upfront costs. If you already own the land outright or have significant equity in it, that can sometimes cover the deposit requirement without needing additional cash savings.

If you're self-employed, expect the lender to ask for two years of tax returns and recent financials from your accountant. They'll assess your income conservatively, so it's worth having those documents updated and ready before you apply rather than scrambling halfway through the process.

What happens during the progressive drawdown

Construction loans are drawn down in stages as the build progresses, which means you're only charged interest on the amount released at each stage rather than the full loan from day one. The lender will set up a progress payment schedule based on your building contract, and each drawdown is triggered by a progress inspection to confirm the work has been completed to the required standard.

A typical schedule might include a deposit payment to the builder, then further payments at base stage, frame stage, lock-up, fixing, and completion. The builder submits an invoice for each stage, the lender arranges an inspection, and once the inspector confirms the work matches the invoice, the funds are released. Most lenders charge a progressive drawing fee for each inspection, which is usually a few hundred dollars per drawdown.

In a scenario where someone is building a new home in Murrumbeena while renting nearby, the interest-only structure during construction keeps repayments lower until the build is finished and they move in. Once the project reaches practical completion, the loan converts to a standard principal and interest home loan and they start paying down the balance while living in the property. The timing between stages can vary depending on weather, availability of trades like plumbers and electricians, and how quickly the builder moves through each phase.

Fixed price contracts and cost overruns

A fixed price building contract protects you from unexpected cost increases during the build, but only if the contract is written properly and the scope doesn't change. If you decide halfway through that you want stone benchtops instead of laminate, or you shift a wall to create more storage, those variations will add to the contract price and may require additional finance.

Lenders much prefer fixed price contracts over cost plus arrangements because they know exactly what the project will cost and can lend accordingly. If your builder quotes on a cost plus basis, where you're charged for materials and labour with a margin on top, most mainstream lenders won't touch it. You'll be pushed toward specialist lenders with higher rates and stricter terms.

Before signing anything, have a mortgage broker review the contract and check that the price is realistic for the scope of work. Builders sometimes underquote to win the job, then load the contract with exclusions and provisional sums that aren't disclosed clearly. Those gaps can blow out your budget and leave you scrambling for additional funds or cutting finishes to stay within the approved loan amount.

Documents you'll need at application

Your lender will ask for proof of income, recent payslips or tax returns, bank statements showing your savings history, and details of any existing debts. On top of that, they'll want a copy of your council-approved plans, the signed building contract, builder's insurance, and the contract of sale if you're purchasing land as part of the project.

If you're undertaking a land and construction package through a developer, some of those documents will be provided as part of the package, but you'll still need to supply your own financial paperwork. The more organised you are at application, the faster the process moves. Missing documents or outdated financials are the main reason construction loan approvals drag out, and when you've got a builder ready to start and a settlement date locked in, delays cost money.

It's also worth checking that your builder can commence building within the timeframe required by the lender. Most construction loan approvals require the build to start within a set period from the disclosure date, usually three to six months. If the builder can't start on time, you may need to reapply or extend the approval, which can mean updated valuations and additional fees.

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