Construction loan

A construction loan is lending advanced in stages as a build progresses, rather than in a single drawdown at settlement.

How it works

Funds are released at defined milestones — foundations, closed-in, lock-up, completion — usually after a valuer or the lender inspects. You pay interest only on the amount drawn, so payments increase through the build.

What lenders require

Fixed-price building contract, full plans and specifications, building consent, builder's insurance and warranties, and a valuation of the completed property ("as if complete").

The risks

• Cost overruns and variations are not automatically covered by the loan. You fund them.
• Builder insolvency mid-build is a serious risk — check what protections exist
• Delays extend the interest-only period and your holding costs
• The as-if-complete valuation may not be achieved, leaving a shortfall at completion

Common misunderstanding

A fixed-price contract is not fixed if you make variations, and most builds have some. Budget a contingency of at least 10%.

Interest during construction is a real cost often omitted from feasibility models. It is generally capitalised or paid as you go, and on a 12-month build it is substantial.

Turnkey avoids most of this by shifting the construction funding to the builder — see off the plan and turnkey.

Related terms

Last reviewed: 1 August 2026 · General information only, not financial advice.

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