Construction & Renovation Loans

The lender does not hand the builder the money. It pays each stage after the builder invoices for it and, at most stages, after a valuer confirms the work is done. You are charged interest only on what has been drawn, which is why construction repayments start small and climb.

Percentages against each stage are set by the building contract and vary between builders and states. The lender funds to the schedule in the contract, so a contract with an unusually front-loaded schedule can create a shortfall the borrower has to cover.

Most construction files that stall do so because of the builder’s paperwork rather than the borrower’s. Have these before you apply.

• A fixed price building contract, commonly on a recognised industry form, signed by both parties.
• The builder’s current licence or registration, in the name on the contract.
• Domestic building insurance or the equivalent home warranty cover for the state, where the contract value requires it.
• The builder’s public liability and construction works insurance.
• Council-approved plans and the building permit.
• A full schedule of finishes and any provisional or prime cost items identified.
• The progress payment schedule, matching the contract.

Fixed price contract

A building contract stating a total price for the works described. It is what the lender funds against, and it is only as fixed as its schedule of finishes.

Prime cost item

An allowance for a fitting or fixture not yet chosen, such as tapware or an oven. The allowance is an estimate. The final invoice is what you pay.

Provisional sum

An allowance for work whose extent is not yet known, such as site works or excavation. Adjusted up or down once the work is done.

Variation

A change to the contracted works, agreed in writing. Variations funded by the loan need lender approval and sometimes a fresh valuation.

Practical completion

The point at which the works are finished and the property can be occupied. It releases the final draw and starts the conversion to a standard loan.

Domestic building insurance

Home warranty cover the builder takes out, required in most states above a contract value threshold. Lenders check it before the first draw.

A construction valuer produces two figures: the current value of the land or property as it stands, and the value once the works described in the plans and contract are complete. The loan is assessed against the on-completion figure, which is why the plans and the specification matter so much.

Where the on-completion valuation comes in below land cost plus build cost, the LVR rises and the funding gap falls to you. It happens most often on unusual designs, on large builds in modest streets, and on regional blocks. A realistic view of the finished value before you sign a contract is cheaper than discovering it at approval.

Owner-builder lending exists and it is considerably harder. Without a licensed builder and a fixed price contract, the lender has no fixed cost to fund against and no third party carrying the completion risk.

• Many lenders decline owner-builder construction outright.
• Those that consider it usually cap the LVR well below a standard construction loan.
• You will need owner-builder registration or permits for the state, plus detailed costings and trade quotes.
• Funding is often limited to the value added rather than the cost incurred.
• An equity release before works start, sized to the whole project, is frequently the more practical route where the equity exists.

If a variation does arise, tell the lender early. Variations funded by the loan need approval and often a revised valuation. Variations paid outside the loan need evidence that you have the funds. Either way, the file moves faster when it is raised before the invoice arrives rather than after.

1. 01

   Before you sign anything

   Get an indicative capacity and a realistic view of the on-completion value. Signing a building contract before finance is understood is the most expensive mistake in this category.

2. 02

   Application with the contract and plans

   The lender assesses the borrower and the project together. Missing builder documents are the usual delay.

3. 03

   Construction valuation

   As is and on completion, based on the plans, the specification and the contract.

4. 04

   Approval and documents

   Unconditional approval, then loan documents. Land settles first where you are buying the block.

5. 05

   Construction begins

   Each stage is invoiced, inspected and drawn. Interest is charged on the drawn balance only, and repayments rise as the build progresses.

6. 06

   Practical completion

   Final inspection, certificate of occupancy, final draw released.

7. 07

   Conversion to a standard loan

   The loan converts to principal and interest over the remaining term. This is the natural point to review structure, offset and pricing.