Unlock the secrets to construction loan funding

What construction finance actually covers

Construction finance releases funds progressively as your build moves through each stage, rather than handing you the full amount upfront. You only pay interest on what's been drawn down at each point, so if $150,000 has been released for your slab and frame, that's all you're charged interest on until the next stage is complete.

Surry Hills presents a particular scenario for construction funding. Most blocks here are either knock-down rebuilds on narrow terraces or significant rear additions to existing workers cottages. That means your construction loan application needs to account for demolition costs upfront, council plans that often require heritage overlays, and a registered builder who understands the constraints of building in a dense inner-city precinct.

How the progressive drawdown actually works

Lenders release funds according to a progress payment schedule that matches your fixed price building contract. Once the builder completes a stage and the lender arranges a progress inspection, the next instalment is released directly to the builder or into your account if you're managing payments yourself.

Most lenders in Australia structure their construction draw schedule into five or six stages: base stage (including slab), frame, lockup, fixing, practical completion, and final inspection. Each drawdown typically represents a percentage of the total loan amount, and you'll pay a Progressive Drawing Fee each time funds are released, usually between $150 and $400 per draw depending on the lender.

Consider a scenario where someone is doing a knock-down rebuild on a 160-square-metre block near Shannon Reserve. They've secured a fixed price contract for the build at a set amount, with land already owned. The lender approves a construction to permanent loan that covers the demolition, the build, and rolls into a standard home loan once the final inspection is done. During construction, they're paying interest-only on whatever's been drawn down, which keeps repayments lower while the property isn't generating any value yet. Once the certificate of occupancy is issued, the loan converts and they start making principal and interest repayments on the full amount.

What lenders actually want to see before approval

A construction loan application requires more documentation than a standard home loan because the lender is funding something that doesn't exist yet. They'll want your council approval, detailed plans, a fixed price building contract with a registered builder, proof you've got the deposit sorted, and evidence that the builder has appropriate insurance.

The development application process in Surry Hills can stretch longer than in newer suburbs due to heritage considerations and the density of the area. Lenders won't release the first drawdown until council approval is unconditional, so factor that timing into your planning. Some lenders also require you to commence building within a set period from the disclosure date, often six or twelve months, so delays in getting council plans finalised can create pressure.

Interest-only repayment options during the build

Most construction loans default to interest-only repayments while the build is underway, switching to principal and interest once construction is complete. That structure makes sense because you're still paying rent or a mortgage elsewhere while the new property is being built, so keeping repayments lower during that phase reduces the financial load.

The construction loan interest rate is often slightly higher than a standard variable rate, though some lenders offer the same rate if you're using their construction to permanent loan product. You're also not locked into a single lender. WealthStreet can access construction loan options from banks and lenders across Australia, so the rate and fee structure you end up with depends on your situation and the lender that suits your build timeline.

When a land and construction package applies

If you're buying suitable land and building on it in one transaction, a land and construction package combines both elements into a single loan. The land component settles first, then the construction loan kicks in once you're cleared to start building.

This setup works differently to a knock-down rebuild because you're not demolishing an existing dwelling. The lender treats the land purchase as stage one, so you'll start paying interest on that portion immediately, even if construction hasn't started. That's where the requirement to commence building within a set period becomes relevant, because the longer you delay, the longer you're paying interest on land that isn't producing anything.

In Surry Hills, vacant land rarely comes up, so most construction funding here involves either a knock-down or a major renovation rather than a land and build loan. If you're looking at a house renovation loan or a rear extension that requires structural work, some lenders will still use a construction loan structure if the scope is large enough and requires progress payments to builders, plumbers, and electricians.

Fixed price contracts versus cost plus arrangements

Lenders strongly prefer a fixed price building contract because it gives them certainty about the total project cost. A cost plus contract, where the builder charges for materials and labour as the job progresses, introduces uncertainty that makes lenders nervous. Most won't touch owner builder finance either, because the risk of cost blowouts or incomplete builds is too high.

If your builder is quoting a fixed price, make sure the contract spells out what's included and what's a variation. The lender will want to see that contract before they'll issue formal approval, and they'll check that the builder is registered and insured. In New South Wales, that means the builder needs to hold the appropriate licence and have home building compensation cover in place.

What happens if the build runs over budget

If your building project runs over the approved loan amount, the lender won't automatically increase your funding. You'll either need to apply for a loan variation, which may or may not be approved depending on your financial position, or you'll need to cover the shortfall yourself.

That's why the quality of your fixed price contract and the accuracy of your costings before you apply matter. If you're doing a custom design build in Surry Hills and the builder hasn't accounted for unexpected issues like rock under the slab or asbestos removal, those costs fall to you unless the contract says otherwise.

Moving from construction to permanent loan

Once the build is finished and the final progress inspection is complete, your construction loan converts to a standard home loan. That conversion is usually automatic if you've used a construction to permanent loan from the start, but some lenders treat them as two separate applications.

The interest rate often changes at this point, moving from whatever rate applied during construction to the lender's standard variable or fixed rate. You'll also shift from interest-only repayments to principal and interest, which will increase your repayment amount. It's worth knowing what that figure will be before you start building, so you're not caught out when the loan converts.

If you're building your dream home in Surry Hills and planning to live in it long term, that conversion marks the point where the loan starts behaving like any other mortgage. If the property is an investment and you're building new home to rent out, you'll likely keep it on interest-only repayment options for tax reasons, though that's a conversation to have with your accountant rather than your broker.

Call one of our team or book an appointment at a time that works for you. WealthStreet works with clients across Surry Hills and can talk through how construction funding applies to your specific build, whether it's a knock-down, a renovation, or a custom home project.

Frequently Asked Questions