Construction Loans and Drawdown: Financing Your New Build

Construction loans are fundamentally different from standard mortgages. Instead of borrowing a lump sum at settlement, you borrow in stages as construction progresses. This is essential for new builds because the property has no value until it’s completed.

A construction loan works like this: you’re approved for $500,000 to build a house. The lender doesn’t hand you $500,000 on day one. Instead, you submit drawdown requests as construction milestones are reached (e.g., slab poured, frame up, lock-up, fit-out complete). The lender inspects, releases funds, and charges interest only on the amount drawn.

Interest during construction is capitalized or rolled into the loan. You typically don’t make principal repayments during the construction phase, only interest on the drawn balance. Once construction is complete, the loan converts to a standard mortgage (principal-and-interest), often automatically over a set term (usually 25 years).

Drawdown timing is critical. If your builder is slow and construction lags six months beyond the expected timeline, you’re paying interest for six extra months. Lenders charge interest at roughly 8.0–9.0% on construction loans (significantly higher than standard mortgages) because the risk is higher and funds are sitting in construction rather than established collateral.

Drawdown requests require documentation. You’ll typically submit: a progress certificate from the builder, invoices or bank statements showing expenses, proof that the previous drawdown was spent on the expected work, and sometimes a statutory declaration. Lenders are cautious; fraud (where builders overstate progress) is not uncommon.

Fixed pricing is important. Before starting construction, lock the builder’s price in writing. Builders often try to add cost escalations if labour or materials increase during construction. A “fixed price” contract protects you from these surprises. If your budget is $500,000 and you’ve borrowed $500,000, a $50,000 cost escalation forces you to inject equity (you can’t borrow more mid-construction without refinancing).

The construction phase is typically 9–12 months for a house, 18–24 months for a multi-unit project. Interest cost during construction can be $20,000–$40,000 on a $500,000 build, depending on drawdown pace and interest rate. This is a real cost that many new builders don’t budget for adequately.

Completion dates are prone to slippage. Builders underestimate timelines; weather, council delays, and supply chain issues create gaps. Build an extra 2–3 months into your timeline. If you’re moving from an existing property and need to sell it to fund construction, manage the timing carefully. Selling before the new house is complete leaves you in temporary accommodation.

Interest rates can change between loan approval and construction completion. Some lenders lock the rate at approval; others allow rate changes until settlement. Confirm your lender’s policy. A 0.25% rate increase during a 12-month construction period adds $1,250 to your annual interest cost.

Lender’s mortgage insurance (LMI) may apply if your LVR is above 80%. LMI cost is rolled into the loan balance and paid over 25 years. On a $500,000 build with 80% LVR, LMI might be $15,000–$20,000. This is often underestimated in budgeting.

Completion certificates and registration are the final hurdle. Once the builder issues a completion certificate and the council approves the final inspection, your lender will release the final drawdown (if not already drawn) and settle the loan into a standard mortgage. Until this happens, you’re technically not the legal owner; the builder’s interest in the property remains.

Disclaimer: This article provides general information only and should not be taken as financial or legal advice. Construction loan terms, drawdown procedures, and builder contracts vary. Consult your mortgage broker, solicitor, and builder before commencing a new build.