20/08/2026
Building a new home is exciting. Working out exactly how the bank pays for it can be somewhat less exciting.
Unlike a standard home loan, where the lender generally provides the funds required to purchase an established property at settlement, a construction loan is usually released progressively as your new home is built.
That means the amount you owe increases throughout construction rather than the full loan being drawn from day one. Understanding how that process works can make the financial side of building considerably easier to manage.
Here’s a step-by-step look at what WA home buyers can expect.
A construction loan is a home loan specifically designed to fund the building of a new home or, in some cases, substantial renovations.
Instead of advancing the entire construction amount upfront, the lender releases funds through a series of progress payments as different stages of the build are completed.
During construction, borrowers will generally make interest-only repayments and are charged interest only on the amount of the loan that has actually been drawn. Once construction is complete, the loan normally moves to the repayment structure selected with the lender, such as principal and interest repayments.
So, how does that work in practice?
Before choosing a block, builder or house design, it pays to know how much you can comfortably spend.
A mortgage broker can assess your income, expenses, existing debts, available deposit and borrowing capacity, while also comparing lenders that offer construction finance.
This is particularly important because construction lending policies can differ between lenders. The right lender for an established home purchase may not necessarily be the right lender for a new build.
Obtaining finance pre-approval early can also help give you a realistic price range before you become too attached to the marble kitchen benchtop, theatre room and outdoor entertaining area that have somehow added another $70,000 to the build price!
If you’re buying land as well as building, there are effectively two components to finance: the land purchase and the construction of the home.
Depending on your circumstances and lender, these may be structured within the same overall lending arrangement or across separate loan accounts or splits.
Before the construction component can receive formal approval, the lender will generally need your signed building contract, plans, specifications and details of any variations or additional works.
Your broker can help coordinate the information required between you, the builder and the lender.
Once the plans and building contract are available, the lender will generally arrange a valuation the proposed completed property as part of its assessment.
Importantly, construction finance is not simply based on adding together the price of your land and your building contract. The lender also needs to be comfortable with the property being offered as security and the overall lending position.
If everything stacks up and the remaining lending conditions are satisfied, formal approval can be issued and loan documents prepared.
Once loan settlement has occurred, finance is in place and the builder has satisfied the necessary requirements to commence construction, work can begin.
In Western Australia, builders will normally request payment as stages of work are completed. Under WA home building laws, progress payments must relate to work actually performed or materials already supplied, rather than simply being requested in advance.
This is the main difference between a construction loan and a standard home loan.
As construction progresses, your builder issues invoices for completed stages. These might include stages such as:
The exact terminology, number of stages and amounts can vary between builders, contracts and lenders.
Once a progress claim is received and the lender’s requirements have been met, the lender releases the appropriate amount from your loan to pay the builder. Some lenders may also require inspections or other evidence before releasing particular payments.
As each payment is made, the amount you have drawn from the loan increases.
One of the benefits of a construction loan is that you generally don’t pay interest on the entire approved loan amount from the beginning.
For example, if you have a $400,000 loan but only $100,000 has been drawn so far, interest is generally calculated on the $100,000 drawn balance rather than the full $400,000.
As additional progress payments are made, the balance increases and so does the amount of interest payable.
Repayment arrangements during construction vary between lenders and loan products, although interest-only repayments on the drawn balance are common. This can be particularly helpful for people who are also paying rent or another mortgage while their new home is being built.
Anyone who has ever built a home will know that changes have a remarkable ability to multiply once construction gets underway.
Additional electrical points. Upgraded flooring. Different tapware. Landscaping. Air conditioning. The latest freestanding bath you saw in Better Homes and Gardens.
These changes can quickly add thousands of dollars to the original cost.
Importantly, a lender will not automatically increase your approved construction loan every time you make a variation to the building contract. Depending on the circumstances, additional costs may need to be paid from your own funds or the lender may need to reassess the finance.
That’s why it is important to discuss significant variations with your mortgage broker before committing to them, as variations made during the building process may not be able to be included within the approved finance.
Keeping some savings aside as a contingency can also provide breathing room for unexpected costs.
When construction reaches practical completion, your builder will issue the final progress claim.
Before releasing the final funds, the lender may require confirmation that construction has been completed in accordance with its requirements and arrange a final valuation or inspection.
Once the final payment has been made, the construction phase of the loan ends. Your loan then moves to the repayment structure agreed with your lender, which will commonly mean principal and interest repayments over the remaining loan term.
And, more importantly, you finally get the keys!
Construction loans involve more moving parts than a standard property purchase. You may be dealing with the lender, builder, land developer, settlement agent and valuers, often with several different deadlines to keep track of at once.
A broker experienced in construction finance can help you:
The Loan Company has been a specialist in construction finance since 1999 and helped thousands of clients finance the construction of their new homes.
Whether you’ve already chosen your block and builder, or are only beginning to look at your options, getting the finance side sorted early can make the building journey easier and more enjoyable.
Speak with one of our experienced mortgage brokers and we can help you understand your borrowing capacity, compare construction loan options and guide you through the process from initial planning through to the final progress payment.
The information contained in this article is general in nature and does not take into account your individual objectives, financial situation or needs. Lending criteria, fees, terms and conditions vary between lenders and are subject to change.
