Preparing your paperwork and budget before you apply is the most useful step you can take towards a construction loan. A lender assesses a build very differently from a standard purchase, so early preparation shapes how smoothly your project moves from approval to completion.
This article is for Croydon residents who are planning to build a new home, whether on land they already own or on a block they are about to buy. The aim is to help you decide what to organise first.
How Does a Construction Loan Work?
A construction loan releases money in stages as your builder completes each part of the build, rather than as one lump sum. You generally only pay interest on the amount drawn down at each point, so repayments start small and rise as the build progresses.
The stages usually follow a progress payment schedule set out in your building contract. These often cover the base, frame, lock-up, fixing and completion. Before each payment is released, the lender will typically arrange a progress inspection to confirm the work is done. The trade-off is that interest-only repayments during construction do not reduce your loan balance, and the lender may charge a fee for each progressive drawdown. You can read more on our construction loans page.
What Should You Prepare Before a Construction Loan Application?
Before you apply, you need a signed building contract, council-approved plans and a clear picture of your borrowing capacity. Lenders want to see that the project is approved, costed and affordable before they commit funds.
In practice, this means your registered builder will provide a fixed price building contract or a cost plus contract, along with the plans and specifications. Your council approval and any development application outcomes need to be in place, because the lender relies on them to value the finished home. Your own side of the file matters just as much. Lenders will look at your income, savings, debts and the land you are building on. Checking your borrowing capacity early shows you what loan amount is realistic before you commit to a design.
Fixed Price Contract or Cost Plus Contract: Which Suits Your Build?
A fixed price contract sets the total build cost up front, while a cost plus contract charges the actual costs of the build plus a builder margin. Lenders tend to be more comfortable with fixed price contracts because the total cost is known.
The trade-off with a fixed price contract is that changes after signing, called variations, can add cost. A cost plus contract offers flexibility, but the final price can rise, and some lenders apply stricter conditions or may not accept it. If you are leaning towards cost plus, speak with a broker before signing so that you know which lenders will consider it.
Why Does the Construction Draw Schedule Matter for Your Budget?
The draw schedule decides when each payment leaves your loan, so it affects both your cash flow and your interest costs. If a payment falls due before you have funds to cover a gap, the build can stall.
Consider a Croydon couple building on land they already own. They sign a fixed price contract and borrow at the illustrative rate of 6.75% p.a. Suppose $200,000 has been drawn by the frame stage. Interest on that amount for a year would be about $13,500, or roughly $1,125 a month. This is an illustration only, not a quote. At the start of the build, the interest bill is far lower, because the drawn balance is small.
The couple prepare for this by keeping a cash buffer for the first month of repayments, and by asking their broker how the lender charges its progressive drawing fee. They also check their builder's stage claims match the lender's schedule. The outcome is that every progress payment is released on time, the builder keeps working, and no stage is delayed by a funding gap. Once the home is finished, the loan can move to a standard repayment structure, sometimes called a construction to permanent loan. You can test the figures with our mortgage repayment calculator.
Do You Need Money Set Aside Beyond the Building Contract?
Yes. A building contract rarely covers every cost of getting a home ready to live in, so you should plan for extra costs beyond the quoted price. Items such as landscaping, window coverings, connections and variations are often outside the base contract, depending on your builder.
Lenders also tend to want to see that you can fund costs that arise during the build, since the loan only releases money against completed stages. Ask your builder for a clear list of inclusions and exclusions, and build a contingency into your budget. The trade-off is that a larger buffer means more savings tied up, but it lowers the risk of a mid-build shortfall.
Should You Build on Land You Own or Buy a Land and Construction Package?
Building on land you already own can use your equity as part of the funding, while a land and construction package bundles the block and the build into one arrangement. The right choice depends on your savings, your timing and how much design control you want.
If you own land, a lender will generally value it and may count it towards your contribution. If you are buying a block, you will usually need to settle on the land first, and the loan then covers the build in stages. With a package, the contract structure can differ, and the timing of land settlement matters. Each path has trade-offs in cost, flexibility and timing, so compare them against your own situation. If you are building your first home, our first home buyers page explains what to consider.
Why Use a Broker for New Home Construction Finance?
A broker can compare construction finance from a range of lenders and prepare your application so it meets each lender's requirements. Because lenders differ on contract types, drawdown fees and inspection processes, that comparison can affect how your build runs.
A broker can also coordinate documents between you, your builder and the lender, which reduces back-and-forth. Lenders pay brokers commissions, so it is reasonable to ask how that applies to your loan. The team at Andor Financial can talk through your plans and explain the options. Learn more about us.
Call one of our team or book an appointment at a time that works for you, and we will help you get your construction loan application ready from the first day of planning.
Frequently Asked Questions
How does a construction loan work?
A construction loan releases funds in stages as your builder completes each part of the build. You generally pay interest only on the amount drawn down at each stage.
What do I need before applying for a construction loan?
You will need a building contract, council-approved plans and a clear view of your borrowing capacity. Lenders also assess your income, savings, debts and the land you are building on.
What is the difference between a fixed price and a cost plus contract?
A fixed price contract sets the build cost up front, while a cost plus contract charges actual costs plus a builder margin. Fixed price contracts are often easier to get approved, but variations can add cost.
Do I need savings beyond the building contract price?
Yes, you should plan for costs outside the base contract, such as landscaping, connections and variations. A contingency buffer reduces the risk of a mid-build shortfall.
