If you’re planning to build your first home, you’ve probably come across the term “construction loan”.
Unlike a standard home loan, which provides the full loan amount upfront, a construction loan is designed specifically for people building a new home. The loan is released in stages throughout the construction process, helping fund the build as work progresses.
For many Perth first home buyers building a house and land package, understanding how construction loans work is an important step towards making home ownership a reality.
What is a construction loan?
A construction loan is a type of home loan used to finance the construction of a new home.
Rather than receiving the entire loan amount at settlement, the lender releases funds in stages as construction progresses. These stages are commonly known as progress payments.
This approach helps ensure funds are only released when specific stages of the build have been completed.
How is a construction loan different from a standard home loan?
When purchasing an established home, the lender generally provides the full loan amount at settlement and repayments begin immediately on the entire balance.
With a construction loan, funds are released progressively throughout the build.
This means you typically only pay interest on the amount that has been drawn down rather than the full loan amount from day one.
For many first home buyers, this can help reduce repayment costs during construction.
What are the stages of a construction loan?
While stages can vary slightly between lenders and builders, a typical construction loan is released across several key milestones.
Deposit
The first step is paying the required deposit for your land and building contract.
Depending on your circumstances, grants and incentives may also contribute towards your overall project costs.
Slab stage
Once site preparation is complete and the concrete slab has been poured, the lender may release the first progress payment.
Plate height stage
This stage occurs when the walls are constructed and the building reaches roof height.
Roof stage
The next payment is generally released once the roof structure and coverings have been installed.
Lock-up stage
At lock-up stage, external doors, windows and other features have been installed, allowing the home to be secured.
Practical completion
The final payment is usually released once construction is complete and the home is ready for handover.
Your lender will often require confirmation from the builder before each payment is released.
What do repayments look like during construction?
One of the benefits of a construction loan is that repayments are usually lower during the build.
Because funds are released progressively, you’ll generally only pay interest on the amount that has been drawn down.
For example, if only the slab payment has been released, you’ll typically only be charged interest on that portion of the loan.
Once construction is complete and the full loan balance has been drawn, your loan will usually transition to standard principal and interest repayments.
What do lenders look for?
Before approving a construction loan, lenders will assess your financial situation in much the same way as they would for a standard home loan.
This may include reviewing:
- Your income
- Your employment history
- Your living expenses
- Existing debts
- Your credit history
- Your deposit and savings
The lender will also review your building contract, plans and specifications before approving the loan.
Can first home buyers use grants and incentives?
In many cases, yes.
Eligible first home buyers in Western Australia may be able to access government incentives that can assist with building a new home.
Depending on your circumstances, this may include:
- The First Home Owner Grant
- Stamp duty concessions
- Low deposit lending options
- Government-backed home ownership initiatives
These incentives may help reduce the amount of savings required before construction can begin
Why do many first home buyers choose to build?
Building a new home offers several advantages for first home buyers.
These can include:
- Access to modern home designs
- Energy-efficient features
- Lower maintenance costs
- The ability to personalise finishes and inclusions
- Potential access to government incentives
House and land packages are particularly popular in growing Perth suburbs such as Byford, Alkimos, Eglinton, Ellenbrook and Baldivis, where buyers can often find a range of options to suit different budgets and lifestyles.
Is a construction loan right for you?
If you’re planning to build your first home, a construction loan is typically the finance solution used to fund the project.
While the process can seem more complex than a standard home loan, understanding how progress payments work and what to expect during construction can help make the journey much smoother.
Taking the next step towards building your first home
Understanding your borrowing capacity, deposit requirements and finance options is often the first step towards building a home.
Speaking with a finance specialist can help you understand how construction loans work, what grants you may be eligible for and how much you may be able to borrow.
With the right advice and support, building your first home could be closer than you think.