You’ve found the block of land. Or maybe you’ve got an older home in a suburb like Baulkham Hills, Kellyville, or Campbelltown that’s worth more as a demolish-and-rebuild than anything else. Either way, you need a construction loan — and if you’ve never done this before, the first thing most people discover is that it works nothing like a standard home loan.
Here’s what’s actually involved, how the numbers work, and why getting a broker involved early can genuinely save you tens of thousands of dollars before the slab is even poured.
What Is a Construction Loan and How Is It Different?
A construction loan is a specific type of home loan designed for building. Instead of receiving the full loan amount upfront (like a standard purchase), the bank releases funds in stages — called progress payments or drawdowns — as each stage of the build is completed.
Typically there are five to six stages:
- Slab / base — once the concrete foundation is laid
- Frame — timber or steel frame is up
- Lock-up — walls, roof, windows, doors done
- Fixing — internal fit-out: plumbing, electrical, plastering
- Practical completion — the final payment once handover is ready
During construction, you only pay interest on the amount drawn down so far — not the full loan. This keeps your repayments manageable while the build is underway, which matters a lot if you’re also paying rent or living somewhere else during the process.
A Real Scenario: Knockdown Rebuild in Kellyville
Let’s put some numbers on it.
Marcus and Tina own a 1970s brick home in Kellyville. They paid $1.1M for it three years ago and it’s now worth roughly $1.25M. The house itself is tired — poor floor plan, asbestos cladding, not worth renovating. They want to knock it down and build a four-bedroom double-storey home. Builder quotes come in at $650,000 for the build. Demo costs another $25,000. They want a small buffer of $50,000 for upgrades and the unexpected.
Total project cost: $725,000
They already own the land outright (no mortgage). The bank values the completed property at $1.85M. Based on an 80% LVR against the completed value, they can borrow up to $1.48M. They need $725K, so their LVR is well under 80% and there’s no Lenders Mortgage Insurance (LMI) required.
During construction, if $300,000 has been drawn at the frame stage, they’re paying interest on $300,000 only. At 6.50% p.a. that’s approximately $1,625 per month — not the full loan amount.
Once the build finishes, the loan rolls into a standard principal and interest home loan — usually at the same variable rate.
Another Scenario: Building on Vacant Land in Campbelltown
Sarah is a first-generation Australian who’s been saving for six years. She bought a 550sqm block in Campbelltown for $380,000 last year. She wants to build a three-bedroom home for $380,000. Her total project value is $760,000 and she’s putting in $120,000 of savings as a deposit, borrowing $640,000.
The LVR is 84% — just above the 80% threshold. This is where lender choice matters.
Some lenders won’t do construction loans above 80% LVR at all. Others will go to 90% or 95% with LMI. And the LMI calculation on construction loans can catch people off guard — some lenders capitalise LMI into the loan (add it on top), which means Sarah’s loan amount increases slightly.
Going direct to her bank, she was quoted a construction rate of 7.20% and told LMI would be approximately $14,500. Through a broker who shops the full panel, she ended up with a non-bank lender at 6.68% and LMI of $9,200 — a saving of more than $5,000 in LMI alone, plus a lower ongoing rate.
What Banks Don’t Tell You About Construction Loans
1. The valuation is on the completed property — not the land alone
Banks lend against the ‘as if complete’ valuation. That means your plans and specifications have to be submitted upfront, and the bank’s valuer assesses what the property will be worth when finished. If your builder’s contract is higher than what the valuer thinks the market will pay, the bank may not lend you the full amount.
This is a real issue with high-spec or large builds. A good broker will flag this risk early and suggest ways around it — sometimes that means going to a lender with a more generous valuation panel.
2. Fixed price contracts are usually required
Almost all lenders require a fixed price building contract from a licensed builder. Cost-plus contracts or owner-builder arrangements are treated very differently, and most major banks won’t touch them. If you’re planning to owner-build, your options narrow significantly and you need specialist lenders who understand the risk profile.
3. Progress payment timing can create cash flow problems
Banks release each drawdown after a licensed valuer inspects the completed stage. That inspection costs money (often $150–$250 per visit, sometimes charged back to you). And there can be a lag of 5–10 business days between the builder requesting the payment and the bank releasing it. If your builder expects payment within a week and the bank takes two, that friction can stall the build.
Some lenders are faster than others. Knowing which ones move quickly matters a lot when you’re paying a builder who has other jobs lined up.
4. Rates shift when you roll to the final loan
The interest rate during construction is often a variable rate. Once the build completes and you switch to a standard loan, some lenders automatically move you to their “standard variable” rate — which may not be their most competitive rate. This is the point where many borrowers should refinance or at least renegotiate. A broker who set up the construction loan should flag this transition before it happens.
Why a Broker Makes a Bigger Difference on Construction Loans
Construction loans are more complex than standard purchase loans. There are more moving parts, more paperwork, more lender quirks, and more things that can go wrong. The gap in lender policy is also wider — a policy that makes one lender unusable for your situation might make another lender perfect for it.
Here’s what a broker actually does that you can’t easily replicate yourself:
- Matches your project to lenders who will actually approve it — not just the ones who advertise construction loans but have restrictive policies
- Reviews your building contract before you apply so nothing surprises the bank
- Manages the drawdown schedule so payments are requested promptly and the build doesn’t stall waiting for funds
- Negotiates the end-of-build loan so you’re not stuck on a lazy default rate once construction is complete
- Coordinates with your conveyancer, builder, and the bank so you’re not the one chasing emails between three parties
Most people who’ve done a construction loan before will tell you the paperwork alone is exhausting. Having someone who does this regularly take the wheel is worth more than the rate difference in most cases.
Construction Loan Rates in Sydney Right Now (October 2026)
With the RBA cash rate sitting at 4.60%, construction loan rates from lenders currently range from around 6.40% to 7.30% p.a. depending on the lender, LVR, and whether you’re building an owner-occupied home or an investment property.
The spread between the best and worst rate available for the same borrower profile is often 0.60%–0.90%. On a $650,000 construction loan, that’s a difference of around $3,900 to $5,850 per year in interest. Over a 25-year loan term, that compounds into a meaningful sum.
Thinking About Building? Start Here
If you’re planning a build or knockdown rebuild anywhere in Sydney — whether you’ve got the land already or you’re still in the planning stage — it’s worth talking to a broker before you finalise anything with a builder. The loan structure can affect which builder you use, how your contract needs to be worded, and what your cashflow looks like during the build.
Loan Connect works with Sydneysiders across all stages of the construction process. Whether you’re at the land acquisition stage, about to sign a building contract, or trying to figure out how to fund the whole project from equity in an existing property — get in touch and we’ll work through the numbers with you.
Call us on 1300 855 155 or use the enquiry form on our website. No cost, no obligation — just a straight conversation about whether your project stacks up and how to structure the finance.
