Construction loan rates operate differently from standard home loans because you're not borrowing the full amount upfront.
Instead of paying interest on the entire loan from day one, you only pay interest on what's been drawn down at each stage of the build. If you've drawn $200,000 to pay for the slab and frame, that's all you're charged interest on, even if your total approved loan is $600,000. As the builder completes each stage and you draw more funds, your interest charges increase proportionally. This structure reduces your borrowing costs during construction, but it also means your repayments fluctuate as the build progresses.
Most lenders charge interest-only repayments during construction, meaning you're not paying down the principal yet. Once the build is complete, the loan typically converts to a standard home loan with principal and interest repayments. The rate you pay during construction might differ slightly from the rate that applies after completion, depending on how the lender structures the product.
What Drives Construction Loan Interest Rates
Construction loan rates are typically higher than standard home loan rates because the lender takes on additional risk. The property doesn't exist yet, so there's no completed asset securing the full loan amount. Lenders also factor in the administrative work involved in managing progressive drawdowns, arranging progress inspections, and coordinating with builders.
At current variable rates, you might see construction loan rates sitting anywhere from 0.10% to 0.50% above a standard owner-occupied variable rate. Fixed rate options exist but are less common, and lenders often limit the fixed rate period to start only after construction is complete. Some lenders apply a higher rate during the construction phase and then revert to a lower rate once you move in. Others maintain the same rate throughout, so it's worth comparing how different lenders structure their products.
Consider someone building in Mount Eliza who's been approved for a $650,000 construction loan with a registered builder. The lender applies a variable rate during construction, charging interest only on the drawn amount. After the first draw of $130,000 for site works and the slab, they're paying interest on that portion alone. Six months later, when another $260,000 has been drawn for framing and roofing, the interest charge increases accordingly. By the time the build is finished and the full $650,000 is drawn, the interest charge reaches its peak, and the loan converts to standard principal and interest repayments at the agreed rate.
How Progressive Drawdowns Affect Your Costs
You'll only pay interest on funds that have been released to the builder at each stage of construction. This is controlled by a progress payment schedule, which is typically tied to specific milestones like slab down, frame up, lock-up, fixing, and practical completion. The lender arranges a progress inspection before releasing each payment, confirming the work matches what the builder has invoiced.
Most lenders charge a Progressive Drawing Fee for each inspection and drawdown, usually between $250 and $400 per draw. If your build has five stages, you're looking at $1,250 to $2,000 in fees across the construction period. Some lenders cap the number of draws or charge higher fees beyond a set number, so if your builder operates on a more granular payment schedule, you might face additional costs.
The benefit of this structure is that you're not paying interest on money sitting idle. If construction takes eight months and you're drawing funds progressively, your average interest cost during that period will be significantly lower than if you'd borrowed the full amount upfront. The trade-off is that your repayments aren't fixed during construction, which requires some flexibility in your budget as the loan balance grows.
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Land and Construction Packages Versus Separate Purchases
If you're buying land and building on it, you can structure the finance in two ways. A land and construction package combines both into a single loan, with the land component settling first and construction funding releasing progressively once you commence building. Alternatively, you might purchase the land with a separate home loan and then apply for construction finance later.
The single-loan approach is more common because it reduces upfront costs and avoids the need to refinance between land purchase and construction. However, most lenders require you to commence building within a set period from the date the land settles, usually 12 to 24 months. If you're not ready to start the build immediately, or if council approval takes longer than expected, that timeline can become tight.
In areas like Mount Eliza, where blocks often come with specific council requirements around design and environmental considerations, the approval process can add months to your timeline. If you're working with a custom design rather than a project home, the development application stage can extend further. Some buyers prefer to secure the land first with a standard loan, finalise their plans and council approval at their own pace, and then refinance into a construction loan when they're ready to build.
Fixed Price Building Contracts and Loan Approval
Lenders prefer fixed price building contracts because they provide certainty around the total project cost. A fixed price contract locks in the build cost with a registered builder, meaning the builder is responsible for any cost overruns. This gives the lender confidence that the loan amount will cover the project from start to finish.
Cost plus contracts, where the builder charges for materials and labour plus a margin, are harder to finance because the final cost isn't guaranteed. Most mainstream lenders won't approve construction finance without a fixed price contract in place, and those that do typically require a larger deposit or charge a higher rate to offset the uncertainty.
If you're planning to act as an owner builder, financing becomes more restrictive. Many lenders either don't offer owner builder finance at all or require a deposit of 20% to 30% and charge a premium on the interest rate. The assumption is that owner builders carry higher risk of project delays, cost blowouts, and quality issues. If you're considering this path, it's worth discussing your specific situation with a construction loan specialist early, as your borrowing capacity and rate will differ significantly from someone working with a registered builder.
What Happens If Construction Costs Change
Even with a fixed price contract, additional costs can emerge if you request variations or if council requires changes that weren't anticipated in the original plans. Variations requested by the buyer are usually not covered by the original loan approval, so you'll need to fund those separately or apply to increase your loan amount.
If the variation is significant and pushes your total loan above what the lender is comfortable with based on your income or the property's valuation, they may decline the increase. This leaves you covering the gap from your own funds or negotiating with the builder to reduce the scope of the change. In our experience, buyers underestimate how quickly variations add up, particularly in custom builds where the initial plan evolves during construction.
If construction stalls or takes longer than expected, you're still paying interest on the drawn amount for the duration. Most construction loans allow up to 12 months for the build, with the option to extend if needed, but extensions can trigger a fee or a rate review. If your builder encounters delays due to materials or labour shortages, your interest cost during construction increases simply because the loan stays in drawdown mode for longer.
Refinancing After Construction Completes
Once the build is finished and you've moved in, your construction loan converts to a standard home loan. At that point, you might choose to refinance with a different lender if you can secure a lower rate or if the features of your current loan don't suit your needs long-term. Some borrowers use construction finance purely to get through the build and then refinance to a more competitive product once the property is complete.
If you've built in an area with strong growth, the property may have increased in value during construction, which can improve your loan-to-value ratio and open up access to lower rates or the ability to remove lender's mortgage insurance if it was part of your original loan. A loan health check a few months after settlement can identify whether refinancing makes sense based on your current situation and the market.
If you're building a custom home in Mount Eliza, where the local market includes a mix of established properties and new builds, the completed value will depend heavily on the quality of construction and how your design compares to surrounding properties. Builders familiar with the area understand what council expects and what buyers value, which can influence both approval timelines and resale appeal.
Whether you're building on your own block, buying a house and land package, or managing a renovation that requires construction finance, understanding how the rate applies at each stage makes a material difference to your cost and cash flow. If you're ready to explore what construction loan options are available based on your specific plans and financial position, call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
Do you pay interest on the full construction loan amount from the start?
No, you only pay interest on the amount that has been drawn down at each stage of the build. As more funds are released to the builder at each milestone, your interest charges increase proportionally.
Are construction loan rates higher than standard home loan rates?
Yes, construction loan rates are typically 0.10% to 0.50% higher than standard variable home loan rates. Lenders charge more because the property doesn't exist yet and there's additional administrative work involved in managing progressive drawdowns and inspections.
What is a Progressive Drawing Fee?
A Progressive Drawing Fee is charged by the lender each time they arrange an inspection and release funds to the builder. This fee usually ranges from $250 to $400 per draw, and over a typical five-stage build, total fees can reach $1,250 to $2,000.
Can you get a fixed rate on a construction loan?
Fixed rate options for construction loans are less common and often only apply after construction is complete. During the build, most lenders charge a variable rate on the drawn amount, then allow you to fix the rate once you move in.
What happens to the construction loan once the build is finished?
Once construction is complete, the loan typically converts to a standard home loan with principal and interest repayments. At that point, you can choose to keep the loan with the same lender or refinance to a different product or lender if you can access better rates or features.
