Construction Loans: The Ins and Outs of House & Land

A construction loan for a house and land package releases funds progressively as your build reaches specific milestones, rather than providing the full loan amount upfront.

That structure affects how much interest you pay, when you need to settle on the land, and how your builder receives payment. For buyers in Camden looking at house and land packages across estates like Emerald Hills or Spring Farm, understanding how progressive drawdown aligns with your builder's payment schedule determines whether your finance will support the project smoothly or create delays.

How Progressive Drawdown Matches Your Build Schedule

Your lender releases funds in stages tied to physical progress on site. Typically, you'll settle on the land first using the land portion of your loan. Once your registered builder has council approval and is ready to start, construction draws occur at stages such as base, frame, lock-up, fixing, and practical completion. Each drawdown requires a progress inspection arranged by the lender to confirm the stage is complete before funds are released to your builder.

You only pay interest on the amount drawn down at each stage, not the full loan amount. During construction, most lenders offer interest-only repayment options to keep costs lower while the build progresses. Once construction is complete and the final draw occurs, the loan converts to a standard principal and interest home loan.

Consider a buyer purchasing a house and land package with a $600,000 total loan. They settle on the land for $200,000, then draw $100,000 at base stage, another $150,000 at frame, $100,000 at lock-up, and the remaining $50,000 at completion. For the first few months after settling the land, they're only paying interest on $200,000. By frame stage, interest applies to $350,000, and so on. That staged approach typically saves several thousand dollars in interest compared to borrowing the full amount from day one.

Fixed Price Contracts and Progress Payment Schedules

Most lenders require a fixed price building contract with a registered builder before approving a construction loan. That contract sets out the total build cost and the progress payment schedule, which should align closely with your lender's drawdown stages. Lenders won't approve cost plus contracts or owner builder finance through standard house and land construction products, as the risk and variability are too high.

Your builder's payment terms need to match the lender's inspection and release process. If your builder requires payment before the lender's inspection is complete, you may face a timing gap. In our experience, builders working regularly on house and land packages in growth areas like Camden are familiar with how construction finance works and structure their contracts accordingly. Still, it's worth confirming that your contract milestones correspond with your lender's drawdown stages before signing.

Construction Loan Interest Rates and Fees

Construction loan interest rates are typically similar to standard variable home loan rates, though some lenders add a small margin during the construction phase. The main additional cost is the Progressive Drawing Fee, which covers the lender's cost of arranging inspections and processing each drawdown. This fee usually ranges from $800 to $1,500 depending on the lender and is often charged upfront or added to the loan amount.

You'll also need to factor in the time between land settlement and starting construction. Most lenders require you to commence building within a set period from the disclosure date, often six to twelve months. If there are delays with council approval or your builder's scheduling, you may be paying interest on the land without construction progressing. That's one reason buyers in Camden often choose house and land packages with estates that have streamlined development application processes and registered builders already approved to work in the area.

Borrowing Capacity and Deposit Requirements

Lenders assess your borrowing capacity based on the total loan amount, not just the land component. They'll want to see that you can service the full loan once construction is complete and repayments convert to principal and interest. Your deposit typically needs to cover at least 10% of the combined land and construction cost, though some lenders prefer 20% to avoid lender's mortgage insurance.

For house and land packages in Camden, where suitable land in established estates often starts from the mid $200,000s and build costs vary depending on custom design inclusions, you'll want to have your finance pre-approved before committing to a package. That gives you certainty around what you can borrow and ensures the lender is comfortable with both the land value and the builder's quote before you're locked into contracts.

What Happens If Construction Stalls

If your build is delayed beyond the lender's expected construction period, usually twelve months, they may require an extension or review. Extended construction periods increase the amount of interest you pay during the build and may affect your overall loan structure. Delays caused by weather, supply chain issues affecting plumbers or electricians, or builder scheduling are common enough that it's worth understanding your lender's policies on extensions before you begin.

Some lenders are more flexible than others when it comes to construction timeframes, particularly if the delay is outside your control. If you're building in a high-growth area like Camden, where construction activity is high and tradies are in demand, choosing a lender with experience in project home loans and progressive payment schedules can make a material difference to how delays are managed.

Linking Land Settlement and Construction Start Dates

You'll need to settle on the land before construction can begin, which means you'll be paying interest on that portion of the loan while waiting for your builder to start. Timing land settlement to coincide as closely as possible with your builder's start date minimises the interest cost during that holding period. That coordination requires clear communication between your solicitor, builder, and mortgage broker to ensure contracts, council plans, and finance approvals all align.

For buyers working with first home buyer concessions, there's an added layer of timing to manage, as stamp duty exemptions or reductions may apply differently to the land and construction components. Your mortgage broker can help sequence those elements so that your finance structure, settlement dates, and build commencement work together rather than creating unnecessary holding costs.

If you're considering a house and land package in Camden and want to understand how construction finance would work for your situation, call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions