Getting your contract, plans and budget in order before you apply is the surest way to keep a construction loan moving. Lenders assess your build as well as your finances, so the paperwork matters as much as your income.
This guide is for Toowong homeowners and landowners who are planning to build or knock down and rebuild. It covers what to line up before you speak to a lender, so there are fewer surprises once the build starts.
What Do Lenders Look For in a Construction Loan Application?
A construction loan application is usually assessed on two things: your financial position and the build itself. That means your income, debts and savings, along with the building contract, plans and costings.
Because the money is released in stages, the lender wants to know the project can be finished for the budgeted amount. A build that looks under-costed can slow an application down. It helps to have your builder's quote, your plans and your own list of extra costs (such as landscaping, fencing and window coverings) ready early.
Your current loans and living costs also count. It is worth checking your borrowing capacity before you sign a building contract, so you know what budget is realistic.
Fixed Price Building Contract or Cost Plus: Which Suits Your Loan?
A fixed price building contract sets the cost of the build up front, which makes it simpler for a lender to assess. A cost plus contract bills actual costs plus a margin, so the final figure can move.
The trade-off with fixed price is that the quote may include a buffer for the builder's risk, and changes you request later are often charged as variations. Cost plus can feel more flexible, but you carry more of the risk if costs rise. The QBCC does not recommend cost plus contracts, and non-completion cover under the Queensland Home Warranty Scheme is not available on them. The QBCC urges you to get formal legal advice before using one.
Many lenders will not accept a cost plus contract for construction finance, and a fixed price contract is the usual requirement. Confirm that your lender will accept the contract type before you sign, and talk to your broker before you commit to either.
Whichever you choose, check that your builder is registered and that the contract clearly lists the stages and the payment for each one. Your lender will use those stages to release funds.
How a Construction Draw Schedule Works in Practice
A construction draw schedule is the list of stages at which the lender pays your builder, and many construction loans only charge interest on the amount drawn down. So your interest starts small and grows as the build progresses.
As an example, consider a Toowong landowner who already owns their block and signs a $500,000 fixed price contract. The builder's progress payments are $100,000 at slab, $125,000 at frame, $150,000 at lock-up and $125,000 at completion.
Before each payment the lender typically arranges a progress inspection to confirm the work is done. Using an illustrative rate of 6.75% p.a. (not a current offer), the monthly interest on the drawn balance looks like this:
- After slab ($100,000 drawn): about $562.50 a month
- After frame ($225,000 drawn): about $1,265.63 a month
- After lock-up ($375,000 drawn): about $2,109.38 a month
- After completion ($500,000 drawn): about $2,812.50 a month
The landowner budgets for the highest figure rather than the first one, and keeps a buffer for the months when a stage runs late. The outcome is a build with no cash-flow shock, because the rising interest was planned for from the start. Your actual rate will depend on your lender and your deposit or equity, and you can see how our construction loans work in more detail.
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Interest-Only Repayment Options During the Build
Many construction loans offer interest-only repayment options during the build, so you only pay interest on what has been drawn. This keeps repayments lower while the home is being built.
The trade-off is that you are not reducing the loan balance during that period. Once the build is finished, the loan usually moves to principal and interest, which is the construction to permanent loan step. Your repayments will then be higher, because you are paying off the loan over the remaining term.
Ask your broker how long the construction period runs and what happens if the build takes longer than planned. If you already have a home loan, a loan health check can show whether your current setup suits a build.
Council Approval and Plans: Sort These Before You Apply
Having your plans and council approval organised early stops delays from reaching your loan. Lenders usually want to see approved plans before they release funds, and any change to the plans after approval can mean paperwork for both the builder and the lender.
Toowong sits within Brisbane City Council, so check the approval requirements for your block with the council and your builder before you finalise the design. If you are building a custom design, ask your builder how long approvals have taken on similar projects, and build that time into your plan.
It also helps to keep your finances steady while this happens. Avoid taking on new debt such as a car loan, and keep your savings in the account the lender has already seen.
Plan for Costs Outside the Builder's Quote
A builder's quote rarely covers everything you will pay during a build. Costs such as site works, landscaping, connections and temporary accommodation may sit outside the contract, so list them before you apply.
If you own your current home while you build, think about where you will live and how you will cover both sets of costs. If you are buying land as part of the project, a home loans conversation early on can show how the land purchase and the build fit together.
If you would like local help from someone who knows the area, our Toowong mortgage broker page explains how we work with clients near you.
Call one of our team or book an appointment at a time that works for you, and we will go through your plans, contract and budget before you apply for construction finance.
Frequently Asked Questions
What should I have ready before applying for a construction loan?
Have your building contract, plans, council approval details and a full budget ready, including costs outside the builder's quote. Lenders assess the build as well as your finances.
Do I pay interest on the whole construction loan from day one?
Many construction loans only charge interest on the amount drawn down, so interest rises as each stage is paid. Check this with your lender, as terms differ.
What is a construction draw schedule?
It is the list of building stages at which the lender releases money to your builder. Each payment usually follows a progress inspection.
What happens to my loan when the build is finished?
The loan usually moves from interest-only to principal and interest, often called a construction to permanent loan. Your repayments will rise because you start paying down the balance.
