What are Construction Loan Features You Need to Know?

Understanding Construction Loans

Building a new home is an exciting journey for Highton residents, but it requires specialized financing. Unlike traditional home loans, construction finance works differently because funds are released progressively as your build progresses. Understanding the key features of construction loans ensures you're prepared for every stage of your building project.

Construction loans provide funding specifically designed for new home construction finance projects, house & land packages, renovations, and land and build loan scenarios. These specialized financial products accommodate the unique requirements of building projects, where money is needed in stages rather than as a single lump sum.

Progressive Drawdown System

One of the most distinctive features of construction funding is the progressive drawdown structure. Rather than receiving the full loan amount upfront, funds are released in instalments as your registered builder completes specific stages of construction. This protects both you and the lender by ensuring money is only advanced when work is actually completed.

The construction draw schedule typically includes:

• Land purchase (if applicable)
• Base or slab completion
• Frame stage
• Lock-up stage (walls, windows, and roof complete)
• Fixing stage (internal fit-out)
• Practical completion

Lenders only charge interest on the amount drawn down at each stage, which can provide significant savings during the construction period. This means if you've only drawn $200,000 of a $500,000 construction loan, you'll only pay interest on the $200,000.

Progress Payment Finance Structure

Construction loans align with your progress payment schedule, which is outlined in your fixed price building contract with your registered builder. Before each drawdown, lenders typically require a progress inspection to verify that the claimed work has been completed to an acceptable standard.

The Progressive Payment Schedule must match your contract terms, whether you're working with:

• A fixed price contract for a project home loan
• A cost plus contract arrangement
• Owner builder finance scenarios

Each progress payment helps pay sub-contractors, including plumbers, electricians, and other tradespeople essential to quality construction.

Interest Rate and Repayment Options

During the construction phase, most construction loan interest rate structures offer interest-only repayment options. This means you only pay interest on the funds drawn down, without repaying any principal. Once construction is complete, the loan typically converts to a construction to permanent loan with standard principal and interest repayments.

This conversion happens automatically in most cases, eliminating the need to reapply or go through another construction loan application process. You'll access Construction Loan options from banks and lenders across Australia through Kardinia Finance, each with different interest rate structures and terms.

Fees and Charges

Construction loans include specific fees not found in standard mortgages:

• Progressive Drawing Fee: charged each time funds are released (typically $300-$500 per drawdown)
• Progress inspection fees: some lenders charge for inspections, while others include these
• Application and establishment fees: similar to standard home loans

Understanding these costs helps you budget accurately for your building project and avoid unexpected expenses.

Timeframe Requirements

Most construction loans require you to commence building within a set period from the Disclosure Date, usually 6-12 months. This ensures your approved loan amount remains relevant to current building costs and market conditions.

The total construction period is also limited, typically to 12 months for standard builds. Custom home finance or complex projects may negotiate longer construction periods, but these require specific approval.

Documentation Requirements

Before approval, you'll need to provide:

• Council approval and development application documents
• Council plans showing the approved build
• Fixed price contracts with your registered builder
• Soil tests and engineering reports
• Insurance certificates

For land and construction package deals or house & land packages, you'll need contracts for both components. If you've already purchased suitable land, you'll provide the title documentation.

Loan Amount and Borrowing Capacity

Your loan amount for construction finance depends on multiple factors, including the land value, building costs, and your borrowing capacity. Lenders typically finance up to 80% of the total project value (land plus construction) without requiring lenders mortgage insurance, though higher lending ratios are possible.

For those undertaking renovations, a house renovation loan or home improvement loan operates similarly, with funds released as renovation work is completed in stages.

Specialist Construction Loan Types

Kardinia Finance can help you access various construction loan products:

• Spec home finance for builders constructing properties for sale
• Off the plan finance for apartment purchases
• Custom design projects requiring custom home finance
• Investment property construction through investment loans
• Owner builder finance for those managing their own build

Each type has specific requirements and features designed for particular circumstances.

Working With a Renovation Finance & Mortgage Broker

Constructing your build dream home or undertaking a significant renovation requires expert guidance. As your local mortgage broker in Highton, VIC, Kardinia Finance understands the specific challenges and opportunities facing local residents.

We help you understand the progress payment finance process, compare construction loan options, and ensure your documentation meets lender requirements. Our knowledge of building new home finance products across multiple lenders means you'll find a suitable solution for your specific project.

Whether you're building a new home, purchasing house & land packages, or planning a major renovation, understanding construction loan features helps you make informed decisions. From progressive drawdown structures to interest-only repayments during construction, these specialized features support your building journey from land purchase through to completion.

Call one of our team at Kardinia Finance or book an appointment at a time that works for you to discuss your construction loan requirements.