Guide to Construction Loan Preparation

Getting your construction loan application right means having your documents, contracts, and costings sorted before you submit anything to a lender.

Most construction loan delays happen because something was missing at application stage. A lender won't assess your loan properly if they can't see a fixed price building contract, council approval, or a realistic breakdown of where the money goes. Preparing these upfront means you get conditional approval faster and avoid rework once your builder is ready to start.

What Lenders Need Before They'll Assess a Construction Loan

Lenders require a fixed price building contract, council approval or development application lodgement evidence, detailed costings, and proof you can service the loan during construction.

Your building contract needs to show a total price, itemised progress payment schedule, and the builder's registration details. If you're doing a land and construction package, the land contract also needs to be included. Council approval doesn't always have to be finalised at application, but most lenders want to see evidence the development application has been lodged and accepted for processing. Detailed costings means a line-by-line breakdown covering the builder, landscaping, driveways, fencing, and anything else that turns dirt into a liveable property.

In our experience, applicants in Caulfield often underestimate how much lenders care about site costs. If you're building on a sloping block near Caulfield Park or dealing with heritage overlays closer to Glen Eira Road, your site preparation costs can be significant. Lenders want to see those figures separated out so they know the loan amount covers reality, not just the base building price.

Fixed Price Building Contracts and Why Lenders Prefer Them

A fixed price building contract locks in the total construction cost and sets out the progress payments the builder will claim at each stage.

Lenders prefer fixed price contracts because they remove uncertainty. If the contract says the build costs $850,000 and the progress payments add up to that figure, the lender knows exactly how much funding you need and when you'll draw it down. A cost plus contract, where the builder charges for actual costs plus a margin, introduces variables that make risk assessment harder. Some lenders won't touch cost plus arrangements at all.

Consider a buyer building a double-storey home on a subdivided block in Caulfield North. Their fixed price contract shows six progress payments: deposit, base stage, frame stage, lock-up, fixing stage, and completion. Each payment corresponds to a defined construction milestone. The lender uses that schedule to set up a progressive drawdown, releasing funds only after a progress inspection confirms the work is done. The builder gets paid on time, the lender controls risk, and the buyer only pays interest on the amount drawn down so far.

How the Progressive Drawdown and Payment Schedule Works

Construction loans release funds in stages as the build progresses, not as a lump sum upfront.

You'll typically see five to seven progress payments, starting with a deposit when contracts are exchanged and finishing with a final payment at practical completion. Between those points, the lender releases funds after each stage is inspected and signed off. Common stages include base or slab, frame, lock-up, fixing, and completion. The exact breakdown depends on your building contract, but the lender will map their drawdown schedule to match it.

Lenders usually charge a progressive drawing fee each time funds are released. This covers the cost of the inspection and administration. The fee varies by lender but often sits between $300 and $500 per drawdown. Some lenders cap the total fees, others charge per inspection. Factor these into your upfront costs when working out how much cash you need outside the loan amount.

During construction, most lenders offer interest-only repayment options. You only pay interest on the amount drawn down so far, not the full approved loan amount. Once construction finishes and the loan converts to a standard home loan, you switch to principal and interest repayments unless you've arranged otherwise.

Council Approval, Development Applications, and Timing

You don't always need final council approval before applying for a construction loan, but you do need evidence that your development application is lodged and progressing.

Most lenders will give conditional approval based on a development application that's been accepted by council and is awaiting decision. They'll make final approval conditional on receiving the actual planning permit or building permit. If your project needs both a planning permit and a building permit, get clarity from your lender on what they need to see at application versus settlement.

Caulfield sits within Glen Eira Council, and depending on where your block is, you might be dealing with heritage overlays or neighbourhood character provisions that slow down approvals. If you're building near the Caulfield Racecourse precinct or in one of the heritage areas around Kooyong Road, allow extra time for the council process. Lenders won't fund a build that doesn't have the right approvals, and most construction contracts require you to commence building within a set period from the contract date. If council delays push you past that deadline, your builder may have grounds to walk or reprice.

What to Include in Your Costings Breakdown

Your costings need to cover every dollar required to go from settlement on the land to a completed, liveable property.

Start with the land price if it's a land and build loan. Add the building contract price, then include site preparation, demolition if applicable, driveways, fencing, landscaping, professional fees like architect or engineer costs, and a contingency buffer. Don't forget council fees, utility connection costs, and any upgrade or variation costs not covered in the base contract. Lenders want to see this itemised, not just a single total.

If you're using an owner builder arrangement, your costings breakdown becomes even more important. Lenders treat owner builder finance differently because you're responsible for managing the sub-contractors, paying for materials, and coordinating inspections. You'll need quotes from plumbers, electricians, and other trades, plus a detailed project plan showing when each payment is due. Most lenders will only lend up to 80% of the land and construction value for owner builders, and some won't lend at all unless you can prove relevant building experience.

Serviceability and Income Assessment During Construction

Lenders assess whether you can afford the interest payments during construction and the full principal and interest repayments once the build is complete.

During construction, you're paying interest on the drawn amount plus rent or your existing mortgage if you haven't sold yet. That dual cost can stretch serviceability, especially if your build runs longer than expected. Lenders model this scenario and want to see you can manage it for at least 12 months. Once construction finishes, your repayments increase because you're paying principal and interest on the full loan amount. The lender's assessment needs to confirm you can handle that higher repayment based on your income and existing commitments.

If you're planning to sell your current home partway through construction to clear an existing mortgage, make sure your construction loan application reflects that timing. Lenders may discount the sale proceeds if settlement is uncertain or the market is soft, so get clarity upfront on what assumptions they're using.

Most construction projects in Caulfield, whether a knockdown rebuild on a large block near Princes Park or a townhouse development closer to Glenhuntly, take between eight and 12 months from slab to completion. Your lender will want a realistic build timeframe in your application because it affects how long you'll be paying dual costs. If your builder quotes six months but the contract allows 12, use the longer figure in your serviceability discussion.

Deposits, Cash Reserves, and Settlement Costs

You'll need a deposit for the land, a deposit for the builder, and enough cash to cover settlement costs, fees, and the gap between drawdowns.

Land settlement usually requires at least 10% of the land value as deposit, sometimes more depending on your lender and overall loan-to-value ratio. The building contract deposit is typically 5% to 10% of the contract price, paid when you sign. On top of that, budget for stamp duty on the land, legal fees, lender establishment fees, valuation costs, progressive drawing fees, and a buffer to cover any delay between when your builder invoices and when the lender releases the funds.

In a typical scenario, someone buying a $600,000 block and building an $800,000 home would need a deposit on the land, a deposit for the builder, and around $40,000 to $60,000 in settlement and holding costs. If you're also holding your existing property during construction, add those mortgage repayments into your cash flow planning.

Call one of our team or book an appointment at a time that works for you to go through your construction loan preparation, confirm what your lender will need, and make sure your application is complete before your builder is ready to start.

Frequently Asked Questions