Construction loans explained
A construction loan funds a new build in stages, not in one lump. Here is how the draws work, why your early repayments stay low, and what to watch.
Last updated 14 June 2026
A construction loan is a home loan that releases money in stages as a new build progresses, with interest charged only on the funds drawn so far. The Property Plug arranges construction lending across WA, keeping repayments low through the 12 months build before the loan converts to standard principal and interest at handover. This is general information, not credit advice.
Why building needs a different loan
When you buy an established home the lender hands over the full amount at settlement. A build is different. The house does not exist yet, so the lender will not release all the money up front. Instead it pays your builder in instalments as each stage is finished and verified. You pay interest only on what has been drawn, which is why a construction loan feels light at the start and steps up as the slab, frame and roof go in.
This staged structure protects everyone. The lender never funds work that has not happened, the builder is paid for completed milestones, and you are not carrying a full mortgage on an empty block. Over the 12 months build, your interest-only repayments grow gradually rather than landing all at once.
The progress payment schedule
| Stage | What is built | Typical share of contract |
|---|---|---|
| Deposit | Contract signed, build scheduled | about 5% |
| Base / slab | Footings and slab poured | about 15% |
| Frame | Wall frames and roof trusses up | about 20% |
| Lock-up | Walls, roof, windows and doors on | about 25% |
| Fit-out / fixing | Internal linings, cabinetry, fixtures | about 20% |
| Completion | Final finishes, handover keys | about 15% |
Indicative WA progress schedule. Exact stages and percentages vary by builder contract.
Who a construction loan is for
A construction loan suits anyone building a new home or a knockdown rebuild, first home buyers and investors alike. It is the right tool whenever the home is built under a fixed-price contract rather than bought finished.
- First home buyers building new can stack the $10,000 grant and pay duty on the land only, lowering the cash to start.
- Investors get interest-only draws during the build and a depreciable new asset at the end.
- Knockdown rebuilders fund demolition and the new home on the block they already own, often using existing equity.
- Granny flat builders can use a smaller construction facility to add a second dwelling and a second income.
What the build phase costs you
Because you are charged interest only on drawn funds, the early months are cheap and the cost rises as more is released. On a $448,000 construction facility at 6.34%, the interest in the first stage might be a few hundred dollars a month, climbing toward roughly $2,360 a month once the full amount is drawn near completion. After handover the loan converts to principal and interest at the full repayment.
Use the repayment calculator in interest-only mode to model the build phase, then switch to principal and interest for life after handover. Pair it with the borrowing power calculator to size a realistic build budget.
This is general information only and does not take into account your objectives, financial situation or needs. It is not credit assistance or a credit quote. Consider whether it is right for you and seek advice. Finance is arranged through Central Lending Solutions, the licensed credit partner The Property Plug works with (Australian Credit Licence or credit representative number [TBC]).
How does a construction loan work?
A construction loan releases the funds in stages as your build reaches each milestone, rather than all at once. You pay interest only on the amount drawn so far, so your repayments start small and grow as the build progresses. At handover the loan converts to a standard principal-and-interest home loan.
What are the progress payment stages?
A typical WA build draws at five stages: deposit, slab or base, frame, lock-up (walls and roof on), fit-out or practical completion, and final completion. The lender pays the builder at each stage after a valuer or the builder confirms the work, and you only accrue interest on funds released.
Do I pay my rent or mortgage and the construction loan at the same time?
Often yes, which is why construction-loan interest is set up as interest-only during the build. The repayments stay low because you are only charged on the drawn portion, easing the squeeze of paying for your current home and the build at once over the roughly 12 month build.
What deposit do I need for a construction loan?
Many lenders build with a 5% to 20% deposit. Because duty is usually assessed on the land alone when the building contract is separate, and first home buyers can add the $10,000 grant, the cash needed to start can be lower than buying established. We size it for your block.
What happens if the build runs over budget?
A fixed-price building contract from a verified panel builder is your main protection, since the price is locked before you start. Variations you request are extra and may need the lender to re-assess. We match you to builders who price the whole job up front so surprises are rare.
Fund your build the right way
Book a free finance call. We structure a construction loan around your build stages and match the lender whose construction policy suits your builder.