Construction Loans Australia: Types, Rates & Eligibility Explained 

Constructing ‍a home or carrying out a property project is definitely one of the most thrilling achievements in a person’s life. However, a financial construction is quite different from a simple property purchase. It is.” In other words, that is the role construction loans play in Australia. These specialised loans are created to facilitate the building process for the borrowers, giving them the freedom to choose, releasing the funds in stages, and setting up the repayment in such a way that it suits the borrower. 

We at Rovo Finance, assist Australians (the situation may be a first-home buyers, investors, or developers) to understand the intricacies of construction loans and find the most suitable product for their ‍‍‌objectives. 

What Is a Construction Loan? 

A ‍construction loan is essentially a short-term financial instrument that covers the expenses related to the building or renovation of a property. Construction loans, as opposed to regular home loans, are not given in one go, but in stages which are also called progress payments. These stages of construction completion are verified by the bank before the next release of funding gets approved.  

Borrowers are allowed to pay only interest on the amounts that have been drawn from the loan which is a very helpful way of handling cash flow during the building process. In most cases, after building is done, the loan is turned into an ordinary principal and interest home ‌loan. 

How Construction Loans Work? 

Construction loans operate differently from traditional mortgages. Here’s how the process usually unfolds: 

1. Loan Approval 
   The lender assesses your financial position, building plans, and cost estimates before granting approval. 

2. Progress Payments 
   Funds are released in stages aligned with construction milestones: 

• Slab or base stage 

• Frame stage 

• Lockup stage 

• Fit out stage 

• Completion 

3. Interest Only Repayments 
   During construction, you pay interest only on the funds drawn down, not the full loan amount. 

4. Loan Conversion 
   Once the build is complete, the loan converts into a standard home loan with principal and interest repayments. 

This staged approach ensures funds are used efficiently and reduces the borrower’s interest burden during construction. 

Types of Construction Loans in Australia 

There are different types of construction loans available. Each are customized to different borrower needs: 

Owner Builder Loans 

Designed for borrowers who manage their own construction project rather than hiring a licensed builder. 

• Pros: Greater control over the project, potential cost savings. 

• Cons: Stricter eligibility criteria, lower loan to value ratios (LVR), and fewer lender options. 

Construction to Permanent Loans 

These loans cover the construction phase & then automatically convert into a standard home loan once the build is complete. 

• Pros: Convenience, no need to refinance. 

• Cons: May have slightly higher rates during construction. 

Land + Construction Packages 

Best for borrowers purchasing land & building a home simultaneously. 

• Pros: Streamlined financing also bundled with builder contracts. 

• Cons: Less flexibility if you want to change builders or designs. 

Construction Loan Interest Rates in Australia 

Construction loan interest rates are generally slightly higher than standard home loans due to the added complexity and risk for lenders. 

• Typical Ranges: Variable interest only rates also sit above standard mortgage rates. 

• Factors Influencing Rates: Borrower’s credit profile, loan amount, project type & lender policies. 

• Conversion: Once construction is complete, the loan usually converts to a lower rate principal & interest mortgage. 

Eligibility Criteria 

To qualify for a construction loan in Australia, borrowers generally need to meet the following requirements: 

• Stable income and proof of employment or business earnings 

• Deposit of around 20% of the total project cost 

• Good credit history 

• Council approved building plans 

• Fixed price building contract with a licensed builder 

Required Documents

When applying for a construction loan, you will need to provide: 

• Identification documents (passport, driver’s licence) 

• Proof of income (payslips, tax returns, business financials) 

• Asset and liability statements 

• Council approved building plans 

• Fixed price building contract 

• Builder’s insurance and credentials 

Benefits of Construction Loans 

Construction loans offer several advantages over traditional mortgages: 

• Cash Flow Management: Interest only repayments during construction 

• Stage Based Funding: Aligns with builder payment schedules 

• Flexibility: Tailored to your project timeline 

• Equity Growth: Build equity as construction progresses 

• Customisation: Finance structured around your unique project 

Common Challenges Borrowers Face 

While construction loans are powerful tools, borrowers often encounter challenges such as: 

• Delays: Weather, council approvals, or builder availability can extend timelines 

• Cost Overruns: Unexpected expenses may require additional funding 

• Complex Documentation: Lenders require detailed contracts and plans 

• Limited Lender Options: Not all banks offer construction loans, especially for owner builders 

How Rovo Finance Helps?

At Rovo, we simplify the construction loan process by: 

• Comparing options across a wide panel of lenders 

• Negotiating competitive rates and terms 

• Guiding you through documentation and approvals 

• Structuring finance to align with your project goals 

• Providing ongoing support from preapproval to settlement 

Our expertise ensures you avoid common pitfalls and secure a loan that works for your circumstances. 

Ready to explore your options? Contact Rovo today to learn more about how construction loans in Australia can help you achieve your goals. 
Call us on 0494 394 747 or email jitendra@rovofinance.com.au