Building or significantly renovating a property can be an exciting yet complex undertaking—especially when it comes to financing. Construction loans (sometimes called building loans) are specifically designed to give you flexibility throughout each phase of your project. Whether you’re renovating an outdated bungalow, building your dream home from the ground up, or venturing into property investment, here’s everything you need to know about how a construction loan can help make it happen.
What Are Construction Loans?
A construction loan is a type of home loan tailored to the unique needs of building or renovating. Unlike a traditional home loan, which disburses the entire amount upfront, a construction loan allows you to access your funds in segments—known as “progressive drawdowns” or “progress payments”—as different stages of your build or renovation are completed.
Key Benefits
- Flexible Drawdowns: You only take out what you need at each stage of the project.
- Interest-Only Options: Pay only the interest during the construction period, helping manage your cash flow.
- Budget Control: By releasing funds progressively, you’re less likely to overspend or exceed your project budget.
How Does a Construction Loan Work?
Most building projects follow a set of stages, which typically look like this:
- Slab or Base – Laying foundations.
- Frame, Roofing & Tiling – Erecting frames and adding external coverings.
- Lock-Up – Securing the structure (windows, doors, etc.).
- Internals – Installing wiring, plumbing, and interior fittings.
- Completion – Final finishes, inspections, and handover.
Each stage usually triggers a separate payment to the builder. With a construction loan, you only pay interest on the funds you’ve drawn down so far—so if the first invoice is $50,000 out of an approved $250,000, you only pay interest on that initial $50,000. As the build progresses and you draw more funds, your interest costs gradually increase.
Interest-Only Period
During construction, most borrowers choose an interest-only repayment option. This helps keep payments lower while you may also be juggling rent or other expenses. Once construction finishes—or after a predefined time—your repayments generally switch to principal and interest, so you can start paying down the loan balance.
Getting Started: The Essentials
1. Choose a Registered Builder
Working with a licensed, reputable builder is crucial. Lenders typically require a fixed-price building contract and detailed construction timeline before approving your loan. This ensures everyone is on the same page about milestones and costs.
2. Prepare Your Documentation
You’ll need to submit essential paperwork, such as:
- Council-approved plans and permits.
- A signed fixed-price building contract (including a Progressive Payment Schedule).
- Proof of appropriate insurance coverage (more on that below).
3. As-If-Complete Valuation
Before construction begins, lenders perform an “as-if-complete” valuation—an expert estimate of your property’s market value once building or renovation is finished. This helps confirm the project’s feasibility and ensures the loan aligns with the property’s projected worth.
Insurance Requirements
Protecting your site, materials, and workers is vital. Your lender will require proof of the following insurances before any drawdowns can occur:
- Builder’s All Risk Insurance: Covers the building and materials in case of damage during construction.
- Domestic/Home Warranty Insurance: Mandatory if you’re using a registered builder. Covers non-completion due to death, insolvency, or disappearance, as well as structural defects caused by negligence.
- Public Liability Insurance: Covers damage or injury to people or property that might occur during the build.
Managing the Unexpected: Cost Overruns
It’s not uncommon for building projects to run over budget. You may decide on higher-end finishes or need to tackle unforeseen site issues. If you exceed the original amount agreed upon for your construction loan, contact your Kanebridge Finance representative immediately. You may need to fund any additional costs yourself if we can’t extend further finance.
Final Payment and Transition to Principal & Interest
When construction or renovation is complete, your lender will typically:
- Review the Final Inspection Report to confirm everything is finished as planned.
- Confirm Compliance Certificates (e.g., occupancy certificates, any final sign-offs).
Once the final payment is disbursed, your loan moves from interest-only to principal and interest repayments—unless you’ve arranged a different loan structure. If your build finishes early, you may choose to switch to principal and interest sooner to begin paying down the loan balance.
Kanebridge Finance: Your Construction Partner
At Kanebridge Finance, we consider ourselves part of your construction team. Here’s how we support you:
- Dedicated Banker: You’ll have a single point of contact who works closely with you (or your broker) throughout the project, helping you manage progressive drawdowns and repayment schedules.
- Flexible Loan Features: We understand the cashflow challenges of a major build, which is why our construction loans offer interest-only options to ease your financial burden during the build phase.
- Clear Communication: If your situation changes at any point, we encourage you to reach out as soon as possible so we can explore options together.
Ready to Build?
From the initial concept to final inspection, Kanebridge Finance helps you finance your dream home or renovation with confidence. By structuring your loan around progressive drawdowns and flexible interest-only periods, we make sure you’re in control every step of the way.
Have questions or ready to get started?
Contact our team today to discuss construction loan options that best suit your budget, project timeline, and future plans. We’ll guide you through the process, ensuring you have the resources, support, and flexibility needed to turn your vision into reality.
