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If you’re thinking of building or making major renovations on an existing property, getting greater control over the process is possible with a construction loan.
A construction loan is a type of home loan that offers flexibility for people who want to build their own home, make major renovations on an existing home, or are looking for a complete knock down and rebuild.
Unlike traditional loans, construction or builders loans draw progressive payments throughout the construction process, while you pay interest only on money that has been used. This helps you keep more money in your pocket when you need it.
This specialised loan for house building is designed around your construction plans. It’s an alternative for people who are looking to build their dream home their way, instead of purchasing an established home or home and land package.
The intent in buying land with a land loan is that you will build at some stage. However, it is not limited to a specific time frame, unlike a construction loan which requires you to start the building process within 6 months of the loan being granted.
Homestar Finance does not currently offer land loans.
When you obtain a construction loan, for owner occupied or property investment purposes, the money is released gradually in what is commonly known as “progress payments.”
This type of loan has the advantage that interest only accumulates on the funds withdrawn, i.e., the amount paid to the builder, not the total loan amount.
Another benefit of this type of loan is that during the construction phase, when your expenses may be higher due to other costs such as rental costs, you will only be required to make interest only payments.
After the 15-month construction loan period commencing from the settlement date, your loan will revert to a standard principal and interest loan repayment. Should building timelines extend past 15 months, we can work with you to extend the interest only repayment period.
Interest only loan repayments start at a lower amount and gradually increase as your home’s construction progresses.
We’ll work with you on all aspects of your loan, including the release of progressive payments, external property valuations and loan repayments.
A major appeal of a construction loan is that you get to hand-pick your team, allowing you to design and build your home to your exact needs. That means you have the freedom to choose your own registered builder, architect, project manager, and subcontractors like plumbers and electricians.
Before you apply for your construction loan, you will need to assemble your construction team and ensure that your land is registered according to your Australian state or territory guidelines. All building plans and contracts must be written up and council approval and builders’ insurance must be obtained.
Once you have your construction home loan approved, things can get underway. A typical building process and progress payment schedule are based on the following construction stages:
Base/Slab
Approximately 20% of the loan amount is for the concrete slab building foundation, and 5% may be included in the builders’ deposit.
Frame
Approximately 20% of the loan amount is for the exterior house and walls, including support structures, electrical conduits, and structural plumbing.
Lockup
Approximately 20% of the loan will be used to install all windows, doors, external walls, roofing, insulation, and gutters.
Fixing / fit out
Approximately 30% of the loan amount is for internal fittings and fixtures in all areas, such as the bathroom and kitchen. Per the building contract, all painting, plumbing, and electrical work has been completed.
Completion
Approximately 10% of the loan amount is for the final stage and payment of construction, including final detailing, fencing, and building site cleanup.
At the end of each construction stage, your builder will send you an invoice aligned with the progress payment schedule in your building contract. To cover the cost of your build, you will need to send this signed invoice to the Homestar Finance Construction team.
The following information needs to be included on each invoice:
We will arrange for a progress valuation inspection report to be undertaken once we receive the invoice. This will be completed by a licensed valuer who will attend the site and confirm that the previous stage has been completed and that the work is in line with the invoice received.
By arranging for a progress valuation inspection report, we help ensure the work is carried out according to the invoice, providing you with greater assurance.
Pre and during construction period
Once your construction loan is approved, we’ll set up an offset account in your name for use, if you request one.
You will be able to access any funds you deposit into the offset account, including using funds available in the offset account via the Visa debit card.
You will however not be able to access the undrawn portion of the loan as progress payments will be made from the approved loan balance.
Post construction period
Once construction is complete, your loan will convert into principal and interest payments and is packed with extra features, not fees.
While purchasing an existing home or one off the plan may be simpler, it may not be as rewarding as designing and building a home exactly the way you want it. Great for owner builders, a construction loan gives you the freedom to create a home designed for you, your family and your lifestyle.
Perhaps you’ve found a vacant lot that is ideal to build your dream home or investment property. Or you want to stay in your area and make major renovations to an existing home in that neighbourhood. Or, maybe you’ve found the perfect location and you want to knock down and rebuild entirely.
If you’re planning to build a home from scratch on vacant land, getting your standard home loan may not be an option. This is because the total value of the property is not known until the construction is complete and therefore cannot be a security for the loan.
While a construction loan can help you build your ideal home, the building process can come with unforeseen challenges, including the responsibility of managing all building contractors. You will also need to arrange all the required paperwork and council approved building plans before the loan is approved.
Construction loans cannot provide certainty on your exact repayments monthly. Our Star Classic construction loan has a variable interest rate which may go up and down depending on external economic factors. Interest only payments also vary based on this variable rate and the overall home loan balance.
There are a number of crucial steps you need to take prior to applying for a construction loan to build a new home or make major renovations to an existing home. It’s important to do your research and understand all of the associated construction costs.
Get in touch to help you gain clarity on your borrowing power, including the amount of money you can borrow so that you can align this with your building plans.
As a prerequisite for getting your construction loan approved, applicants must provide their lender with the following upon application:
Dive deep into research before you make commitments to your builder. Consider the availability of land or an existing property in your chosen location and price range.
Before you buy, it’s worthwhile finding out about any local council rules and restrictions or upcoming development applications in the area that could affect the valuation of your property. Seek professional advice where necessary.
Additionally, identify the location of infrastructure and accessibility to services such as electricity, gas, water, drainage, sewage, telephone and broadband internet. You may need to factor in implementation costs if they don’t exist on the property already.
Your building or major renovation must be confirmed in a signed fixed price building contract by a registered and approved builder in your respective Australian state or territory.
Once your licensed builder is selected, you can then begin to work together to create your construction plan. Employing an architect may also be necessary to draw up specific construction designs. Depending on your chosen building company, you may also need to arrange a project manager and other subcontractors.
Your final building contract needs to detail each stage of the construction plan, as this will be used as a reference for future construction loan progress payments.
For your construction loan to be approved, an appraisal needs to be done to determine the ‘on completion value of the property’, inclusive of the home and land.
The valuer will compare the fixed price building contract and their assessment of total land and construction costs against real estate sales in the local area to determine the overall property value. This amount will help decide your loan amount and will be used as security for the loan.
Insurance will be needed to safeguard the construction work and the workers. You’ll need to factor in the costs of insurance for the entire building period of your construction loan.
Your builder will need to have their own insurance. You will also need to obtain quotes for your own home building insurance policy and public liability insurance to cover the building process, property damage or individual injury.
You will need to obtain all required land and building permits from the local council area. It’s important to also understand all their rules and regulations that may affect what, how and exactly where on your property you are planning to build. Ticking all of these boxes will ensure that you save time and money in the long run.
To be successful in obtaining a construction loan, your building contract must outline the substantial renovation of an existing home. If this is not the case, you may choose to apply for a different type of home loan if you are only planning to only make minor renovations.
For the minor renovation of an existing property, you could apply for a first home buyer loan or any other relevant home loan with additional funds included on top of the purchase price for renovations. Or if the renovations are planned for your current residential or investment property, you may opt to refinance your existing home loan to make additional money available for this purpose.
Once your construction loan has been approved and the contract has been signed, you will have a maximum of 6 months to begin your construction process as a condition. We’ll take care of all the valuation assessments and progress payments for you.
Once construction is complete, your contractual loan term begins from that day forward requiring both principal and interest repayments. Typically, the life of a construction loan is 30 years.
If at any stage there are changes to the building contract, project amount or council approved plans, please inform us straight away.
Contact our friendly team or fill in this form and we’ll get back to you pronto.
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A construction loan is paid in stages, often referred to as progress payment. This covers each stage of your build. Your builder will outline the total amount needed to construct your home, dividing the expected costs into several segments, this is called the Progress Payment Schedule and is contained in the Building Contract signed by you and the Builder. Payment is sent direct to the builder, so you do not need to worry about transferring funds yourself.
Homestar Finance will be you every step of the process, and will send someone to check on the progress of construction before releasing the next payment to your builder.
Yes, each invoice that is presented for payment must have the following information
On the builder’s letterhead;
(a) Contain the builder’s bank account details;
(b) Provide the break-up of the amount claimed highlighting any price variations;
(c) Signed and dated by the builder; and
(d) Signed and dated by all borrowers.
Once we have entered into a signed contract you will not be able to increase your loan amount until the construction period has completed. It is important you borrow enough money upfront to complete the construction.
Once building is underway it important you lets know straight away if there are any changes to your building contract or council approved plans.
Yes. As a first home buyer, you can apply for a construction home loan if you are planning to build a new home. Construction or building loans are for all types of applicants that choose to build, substantially renovate or knock down and rebuild their home.
If you’re applying for a First Home Owners Grant (FHOG)in your state or territory in Australia, then you must meet their requirements and apply for the grant separately to your construction loan. You may also be able to apply for the First Home Guarantee (FHBG).
The maximum loan amount for a single security construction loan is $1,250,000. This maximum loan amount increases to $2,000,000 under multiple security, which is when you include multiple properties at different locations under the one loan.
Once the construction loan contract is signed and entered, the total loan amount cannot be increased until the construction period of 15 months is complete. It may be worth factoring in a certain amount of money as a buffer into your total loan amount for any possible challenges during the construction process.
1 Rates shown apply to new eligible loans only, up to 80% LVR, loan amount up to max of $1 million and at least one applicant is on PAYG employment. Rates are subject to change without notice. Existing borrowers may have different interest rates which are dependent on the rate offered to the borrower at the date when a home loan settled and any reductions or increases the lender decided to make on the existing loan over time. Accordingly, there is not one standard variable rate that applies to all Homestar Finance home loans and existing customers can confirm their current rate(s) by logging in to internet banking or by contacting customer service. Terms, conditions, and eligibility criteria apply.
2 Comparison rates are based on a basic Homestar Finance loan, on a $150,000 loan amount over 25 years. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
3 Fees are indicative and subject to change, if the loan applicant does not proceed to settlement then all fees including valuation and legal fee incurred during processing of the loan application (where applicable) will be payable in full by the borrower/s.
4 Discharge fee is waived if loan reaches full term as per the loan agreement.
Other fees and charges may apply.
DISCLAIMER: Terms, conditions and eligibility criteria apply to all our loan products and features. Fees and charges are payable. Final approval is subject to credit assessment. Information valid as at 28th February 2025 which is subject to change without notice. Third party cost(s) incurred by service provider(s) are payable and may vary or increase depending on the service provider, nature of the service and request. Any additional cost(s) are passed on directly to the applicants(s). If there is a variation or an increase, a separate quote will be provided. Please consider if the product is appropriate for your individual circumstances. If you need assistance or have any questions about a product or feature and its suitability, please contact our Loan Specialists.
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