If you’re buying a house and land package or building a new home from scratch, chances are you’ll be using a construction loan — which works a little differently from a standard home loan.
Let’s break it down in simple terms so you know what to expect and can plan ahead with confidence.
What is a construction loan?
A construction loan is a type of home loan designed specifically for people building a new home. Unlike regular home loans (which are paid out in full upfront), construction loans are paid in instalments — usually called progress payments — as your build moves through key stages.
These stages typically include:
- Slab stage
- Frame stage
- Lock-up stage
- Fixing stage
- Completion / handover
Each time your builder completes one of these milestones, your lender releases the next portion of the loan to cover the cost.
When do repayments start?
You’ll start making loan repayments as soon as your land settles — this is when the lender pays for your block and it officially becomes yours. At this stage, you’ll only be making repayments on the amount borrowed to purchase the land, not the full build cost.
How do repayments work during construction?
Here’s how it usually works:
- Interest-only repayments: During the build, many lenders require interest-only repayments. That means you’re only paying interest on the amount that’s been drawn down — not the entire loan or principal. This keeps your repayments more manageable while construction is underway.
- Repayments increase as the build progresses: As more funds are released to your builder during each stage, your loan balance increases — and so will your repayments. You won’t be paying the full amount until the home is fully built and all the funds have been used.
- Switch to principal and interest: Once your home is complete (or after a set period like 12 months, depending on your lender), your loan will switch to principal and interest repayments, so you can begin paying off your mortgage and building equity.
How much will I pay during construction?
This depends on a few factors, such as:
- The total loan amount
- The interest rate
- The length of your build
- How much has been drawn down at each stage
Your lender or mortgage broker can give you a personalised estimate, so you’ll have a clear idea of what your repayments will look like throughout each stage.
Tip: Make sure you factor these amounts into your budget early — even before construction begins — so you're not caught off guard as repayments increase.
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