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How new home construction loans work

Development engineers talking at a building site | Financial Information | Tiger Finance

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What are new home Construction loans?

If you are looking into building your dream home, chances are that you have come across the term ‘construction loan’. Loans can be confusing at the best of times, let alone when you are trying to organise a build. Luckily, Tiger Finance has you covered with everything that you need to know before you begin the application process.

Construction loans are high interest, short-term loan that are used to cover the costs of building or renovating your home. Unlike a home loan, which is usually based on the market value of the home in comparison to other recent sales in the area, construction loans are based on what the projected value of the home will be once work is completed.

If you are wondering exactly how new home construction loans work, we have outlined all that you need to know in the article below.

What Are Construction Loans?

A construction loan is a type of home loan that are designed to help people who are beginning or in the process of building a home, as opposed to purchasing an already built property. A construction loan is typically set up as a progressive drawdown loan.

That means that instead of receiving one lump sum in the beginning, you will receive funds for each stage of the build as they happen. Generally, you only have to pay interest on the amount that is withdrawn, rather than the whole loan amount.

How Do progress Payments Work?

Construction engineers working over development plans | Financial Information | Tiger Finance

Once a construction loan has been approved and construction has begun on the property, lenders will usually make progress payments throughout the various stages of construction. Progress payments will typically be paid directly to the builder at the completion of each stage after you approve the lender to do so.

  • Base – This first amount is given to help you lay the foundation of your property. It can be used to cover the levelling of the land, as well as the waterproofing and the plumbing in your foundation.
  • Frame stage – This amount is to help you build the frame of your property. It can usually be used to cover some brickwork, the roofing, windows and trusses.
    Lockup – This amount is designed to help you put up the external walls, and put in windows and doors in order to make your house secure and lockable.
  • Fitout – This is an amount given to help you install all of the internal fittings and fixtures of your new house. It can be used in order to pay for things such as plasterboards, benches, plumbing, gutters and electricity.
  • Completion – These funds are for final payments for builders and equipment, as well as any finishing touches that are needed such as plumbing, and electricity.

As construction loans are withdrawn in stages, interest is normally paid based on the funds used so far. For example, if by the third stage of construction, only $100,000 has been withdrawn on a $200,000 loan, then you would only pay interest on the $150,000 amount.

Types Of Construction Loans

There are many types of construction loans though, and it is important to know which you need before you begin the process of applying.

Construction to permanent loan

In a construction to permanent loan, the money is typically drawn out in stages as the build progresses. Instead of receiving one large sum at the beginning of your build or renovation, you will receive what is needed to lay the foundation, and then put up a frame, and so on. These loans are ideal if you have a definitive timeline and construction plan to follow.

Renovation loan

A renovation loan is for you if you have purchased a property that needs major work completed on it. This type of loan is generally smaller in value, as the cost of renovations are significantly less than those of building from scratch.

Owner builder construction loan

Owner builder loans are when the borrower also acts in the capacity of the homebuilder. Most lenders do not allow this type of loan, due to the complexity of construction and the understanding of building codes. Lenders that do allow this loan generally need the borrower to be a licenced builder.

Construction only loan

This loan is to provide the funds necessary to complete the building of the property and must be paid off in full once building has been completed. The funds from these loans are dispersed based on the percentage of the project that has been completed, and the borrower is responsible for covering the interest payments on the amount drawn.

End loan

An end loan is another name for a mortgage. You will probably need this loan after construction has been completed.

Off the plan loan

An off the plan loan is where a developer has a pre-approved plan to construct an apartment complex. To ensure a quick sale on completion, the developer will offer the apartments for sale before construction has begun. This means that the balance of the purchase price is paid when construction has been completed.

Where Does Tiger Finance Come In?


With Tiger Finance, we can help to get you a hassle-free construction loan. You will have a free consultation with one of our specialists, and we will tailor-make you a loan. We will negotiate with lenders on your behalf before you are approved.

We have helped countless Australians with both good and bad credit ratings to be funded for their dream build. We understand that lending criteria from other lenders are too strict, and can stop you from achieving your goals. That is wrong, and it should not hold you back.

How We Can Help

Our finance specialists can help you find the right construction loan for your project. Construction finance is a complicated topic, and that is where Tiger Finance can help. We will find a loan that makes your dream project that much easier.

If you are one of the many Australians finding getting a construction loan difficult, Tiger Finance can make the process simple and pain-free.

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