Avoid These 7 Mistakes When Buying Custom Home Projects

The Contract You Sign Determines the Loan You Get

Most lenders won't approve construction funding until your building contract meets their criteria. That means the type of contract you negotiate with your builder directly affects whether your loan gets approved, how much you can borrow, and when funds get released during the build.

Consider a buyer purchasing suitable land in Mount Eliza for $850,000 who wants to build a custom design home valued at $750,000 on completion. They find a builder willing to work on a cost plus contract, which gives them flexibility to make changes during construction. The lender declines the application because cost plus contracts don't specify a final price, making it impossible to calculate a reliable loan amount. The buyer goes back to the builder, renegotiates a fixed price building contract at $720,000, and the loan gets approved within a week. The contract structure was the only thing that changed.

This isn't about one lender being difficult. Most banks and lenders across Australia require fixed price contracts for custom home finance because they need certainty about the final loan amount before they commit funds. A cost plus contract leaves the door open for cost overruns that push the total beyond what you can borrow or afford.

Why Fixed Price Contracts Matter More Than You Think

A fixed price building contract locks in the total build cost before construction starts, which protects both you and the lender from unexpected expenses.

When you apply for new home construction finance, the lender assesses two things: the land value and the contracted build cost. If your total loan amount exceeds 80% of the combined value, you'll need lenders mortgage insurance. But that calculation only works if the build cost is fixed. Without a firm number, the lender can't determine your loan-to-value ratio, which means they can't price the loan or assess the risk. That's why applications with cost plus contracts get declined before they even reach an underwriter.

Fixed price contracts also determine your progress payment schedule. Lenders release funds in stages based on construction milestones like slab down, frame up, lock-up, and practical completion. If the contract doesn't specify these milestones and their associated costs, the lender can't structure a progressive drawdown that aligns with the build.

How the Progressive Drawing Fee Works in Practice

Lenders only charge interest on the amount drawn down at each stage of construction, not the full loan amount upfront.

That sounds appealing until you factor in the Progressive Drawing Fee, which typically ranges from $300 to $600 per drawdown. Most land and construction packages require five to six progress payments, so you're looking at $1,800 to $3,600 in drawdown fees alone. Some lenders cap this at three or four free drawdowns and charge for anything beyond that. Others charge a flat fee regardless of how many inspections occur.

The structure of your building contract directly impacts how many drawdowns you need. A contract that breaks payments into ten stages instead of five doubles your fee exposure. When you're negotiating the contract with your builder, ask how many progress payments they require and compare that to the lender's fee structure. A builder who wants eight payments might cost you an extra $2,000 in drawdown fees compared to one who works with five standard stages.

Interest-only repayment options during construction keep your cash flow manageable while the build progresses. You're only paying interest on whatever portion of the loan has been drawn, which is usually much lower than your ongoing mortgage repayments will be once the build finishes. But if your builder front-loads the payment schedule and draws down 60% of the loan in the first two stages, your interest costs jump quickly even though construction has barely started.

Council Approval Delays That Kill Your Loan Approval

Most construction loan applications require council approval before the lender will issue formal loan documents.

Mount Eliza sits within the Mornington Peninsula Shire, which has specific planning overlays affecting custom design builds near coastal areas and vegetation zones. If your block has a vegetation protection overlay or falls within a neighbourhood character precinct, your development application might take three to six months instead of the standard eight to twelve weeks. Lenders won't lock in your construction loan interest rate or approve your application until council plans are stamped, which means a delay in council approval pushes your whole build timeline back.

Some buyers assume they can start the loan application while the development application is still being assessed, but most lenders won't progress the file without stamped council plans. If your builder has already locked you into a contract that requires you to commence building within a set period from the Disclosure Date, a council delay could put you in breach of that contract before the loan even settles.

The solution is to work with a registered builder who understands local council requirements and builds the approval timeline into the contract from the start. That way the contract commencement date is tied to council approval, not a fixed calendar date that might pass while you're still waiting for permits.

What Happens When Your Valuation Comes in Low

The lender orders an independent valuation based on the land price plus the contracted build cost, and if that valuation comes in lower than expected, your loan amount shrinks.

In a scenario like this, a buyer secures land in Mount Eliza for $850,000 and signs a fixed price building contract for $720,000, giving a total project cost of $1,570,000. They're borrowing 80%, which is $1,256,000. The valuer assesses the completed home at $1,480,000 instead of $1,570,000 because recent sales in the area don't support the projected value. The lender recalculates the loan at 80% of $1,480,000, which is $1,184,000. The buyer is now $72,000 short and needs to either increase their deposit, renegotiate the build cost with the builder, or find a different lender willing to lend at a higher ratio.

This happens more often with custom home finance than it does with house and land packages because there's no comparable sale to benchmark against. The valuer is estimating what your finished home will be worth based on similar properties in the area, but if your design includes high-end fixtures or a layout that doesn't suit the local market, the valuer might not assign full value to those features.

You can reduce this risk by reviewing recent sales in your target area before you finalise the building contract. If similar homes are selling for $1,400,000 to $1,500,000, don't assume your custom build will be valued at $1,600,000 just because that's what it costs to construct.

Interest During Construction Adds Up Faster Than You Expect

You'll be paying interest on drawn funds during the build, but you're also still paying rent or a mortgage on your current home unless you already own the land outright.

Most buyers underestimate how long construction takes. A six-month build can easily stretch to nine or ten months if there are delays with materials, weather, or subcontractors. If you're paying $2,500 a month in rent and another $1,800 in interest on the construction loan by the halfway point, that's an extra $4,300 a month that wasn't part of your original budget. Over ten months, that's $43,000 in holding costs before you even move in.

Some lenders offer the option to capitalise interest during construction, which means the interest gets added to the loan balance instead of being paid out of pocket each month. That keeps your cash flow intact during the build, but it also increases your final loan amount and your ongoing repayments once the loan converts to principal and interest.

If you're planning to sell your current home to fund part of the build, make sure the sale settlement aligns with your construction draw schedule. Selling too early leaves you paying rent while you wait for the build to finish. Selling too late means you're carrying two mortgages if you've already drawn down part of the construction loan.

The Loan Amount Shifts When Your Build Starts

Your construction loan application might get approved months before you actually start building, and if property values or interest rates shift in that time, your borrowing capacity can change.

Lenders typically give you twelve months from loan approval to commence building, but if values in Mount Eliza drop by 5% during that period, the lender might reassess your loan amount based on the new valuation. Similarly, if your employment situation changes or you take on additional debt between approval and drawdown, the lender can withdraw the approval or reduce the loan amount.

This is particularly relevant for buyers using construction to permanent loan structures, where the loan automatically converts from construction funding to a standard home loan once the build is complete. The conversion happens at whatever the lender's current variable or fixed rates are at the time of completion, not the rates that applied when you first got approved. If rates have increased by 1% during the build, your repayments after conversion will be higher than you originally calculated.

Most buyers focus on getting the loan approved and assume that's the finish line, but approval is just the start. The real risk period runs from approval through to practical completion, which is often twelve to eighteen months. Anything that affects your financial position or the property value during that window can change the outcome.

Owner Builder Finance Gets Declined More Often Than You'd Think

If you're planning to act as an owner builder to save on builder margins, most lenders won't approve construction funding unless you can prove relevant building experience.

Owner builder finance is technically available, but in practice it's limited to buyers who hold a building license or have completed similar projects before. Lenders see owner builders as higher risk because there's no registered builder guaranteeing the quality or timeline of the build. If the project runs over budget or takes twice as long as planned, there's no third party to hold accountable.

Even if you find a lender willing to consider owner builder finance, they'll usually cap the loan at 60% to 70% of the project value instead of the 80% or 90% available with a registered builder. That means you need a much larger deposit upfront, which defeats the cost-saving purpose of going the owner builder route in the first place.

If saving money is the goal, you're usually ahead working with a registered builder on a fixed price contract and accessing standard construction funding at a higher loan-to-value ratio. The builder's margin might feel like an added cost, but it's offset by the lower deposit requirement and the lender's confidence in approving the full loan amount.

---

If you're looking at land and build options in Mount Eliza or planning a custom home build anywhere in Australia, call one of our team or book an appointment at a time that works for you. We'll review your building contract, compare construction loan options from banks and lenders across Australia, and make sure your loan structure aligns with your build timeline before you sign anything.

Frequently Asked Questions