Have you found the ideal location but the house needs major home renovations? Or perhaps you're looking at buying off the plan but want to add your own touches? If you're considering a purchase and renovation project in Queensland, you'll need to understand how construction loans work.
Unlike a standard home loan where you receive the full loan amount upfront, construction loans operate differently. They're designed specifically for projects where you're not just buying a finished property – you're creating something new.
What Makes Construction Loans Different?
When applying for a loan for your purchase and renovation project, the lender will arrange an 'as if complete' valuation. This means they'll assess what your property will be worth after all the work is finished, not just its current state.
The key difference is the progressive drawdown system. Instead of receiving all your funds at settlement, you'll access money in instalments as your project reaches various stages of completion. This approach means you'll only charge interest on the amount drawn down at each stage, which can save you thousands in interest costs.
How Progressive Payments Work
Your construction loan will be structured around construction milestones. Here's how the process typically unfolds:
- Initial drawdown – Usually covers the land purchase or deposit
- Foundation stage – Released when concrete slab or foundations are complete
- Frame stage – Available once the frame and roof are installed
- Lock-up stage – Covers external walls, windows, and doors
- Fixing stage – Released when plumbing, electrical, and internal work begins
- Final drawdown – Covers completion and final inspections
Each drawdown requires an inspection to confirm the work matches the approved plans and permits. Your lender will typically charge a Progressive Drawing Fee for each inspection and release of funds.
Planning Your Purchase and Renovation Project
Before you start looking at properties, make a plan for your project. Consider your price range and what type of renovation you want to undertake. Are you planning to demolish existing property for a new build, or will you renovate and extend?
You'll need to factor in:
• Council restrictions and regulations for your chosen area
• Whether the land is suitable for your renovation plans
• If you'll need a development application
• The cost of hiring a registered builder
• Additional expenses for plumbers, electricians, and other specialists
• Time frames and when you need to commence building
Working with Contractors and Fixed Price Contracts
Most lenders require fixed price contracts for construction loans. This protects both you and the lender by establishing clear costs upfront. Your contract should include a detailed Progressive Payment Schedule that aligns with the loan's drawdown stages.
Remember to pay sub-contractors according to the agreed schedule, and keep detailed records of all progress payments. Note that Out of Contract Items not included in your original agreement will need separate funding arrangements.
Interest-Only Repayment Options
During the construction phase, most lenders offer interest-only repayment options. You'll only pay interest on the funds you've drawn down, not the entire loan amount. This can help manage cash flow during your renovation when you might not be living in the property or could be paying rent elsewhere.
Once construction is complete, your loan typically converts to a standard principal and interest home loan. Some borrowers choose to refinance at this point to secure a different interest rate or loan structure.
Additional Payments and Budget Management
Construction projects often require additional payments beyond the original contract. Whether it's upgrading fixtures, dealing with unexpected structural issues, or changes to council plans, having a buffer in your budget is crucial.
A home improvement loan might be suitable for smaller additional costs, while larger variations might require adjusting your construction loan amount.
Choosing the Right Lender
Not all lenders offer construction loans, and terms can vary significantly. Working with a renovation Mortgage Broker gives you access Construction Loan options from banks and lenders across Australia. They can help you compare interest rates, loan amounts, and find a lender with a streamlined application process.
Some lenders specialise in house & land packages, while others are more flexible with renovation projects. The right broker will match you with lenders who understand your specific project type and location requirements.
Getting Started with Your Application
When you're ready to move forward, gather all your documentation including approved council plans, building contracts, and financial information. Most lenders require you to commence building within a set period from the Disclosure Date, so timing your application correctly is important.
Your broker will help ensure your application includes all necessary documentation and guide you through each stage of the approval and drawdown process.
Ready to turn your purchase and renovation dreams into reality? Call one of our team at LBK Lending or book an appointment at a time that works for you. We'll help you access the right construction loan for your Queensland project and support you through every stage of the process.
