Building your own home in Melbourne is one of the most rewarding — and most misunderstood — financial decisions you can make. A construction loan works very differently to a standard home purchase, and knowing how it works before you sign a building contract can save you thousands and prevent nasty surprises mid-build.
KEY TAKEAWAY: With construction loans, you only pay interest on funds already drawn — so your repayments stay low while the build progresses through its five stages, rather than on the full loan amount from day one.
What Is a Construction Loan?
A construction loan is a home loan designed for a property that doesn't yet exist. Rather than paying the full approved amount to a vendor on settlement day (as with a standard purchase), the lender releases your funds in stages — known as progressive drawdown — paying your builder directly as each phase of the build is completed.
Because the lender's security (your finished home) doesn't exist yet, construction loans carry additional conditions compared to standard mortgages. Expect a more thorough approval process, and construction loan rates vary between lenders — contact IFG directly to discuss current rates and find the most competitive option for your situation.
The Five Stages of Progressive Drawdown
Most Australian lenders structure construction loans across five standard progress payment stages. Funds are released to your builder at the completion of each stage, following a lender inspection and submission of the builder's invoice. Most lenders charge a progressive payment fee of $200–$400 per drawdown to cover their inspection costs — factor this into your budget when comparing lenders.
| Stage | What's Completed | Typical % of Contract |
|---|---|---|
| 1. Base / Slab | Foundation excavated, footings poured, concrete slab completed | 10–15% |
| 2. Frame | Wall frames and roof structure fully erected and inspected | 20–25% |
| 3. Lockup | External walls, windows, doors and roofing installed | 20–25% |
| 4. Fit-out / Fixing | Plumbing, electrical, plastering, kitchen & bathroom joinery, flooring | 25–30% |
| 5. Practical Completion | Certificate of occupancy issued, keys handed over | 5–10% |
How Interest Works During the Build
This is the feature most borrowers appreciate most: you only pay interest on the funds that have been drawn, not the full approved loan amount.
For example: if you've been approved for a $600,000 construction loan but only $180,000 has been released by the Frame stage, your interest charge that month is calculated on $180,000 — not $600,000. This keeps your repayments low while you may also be paying rent or a mortgage on your existing home.
The interest-only period typically runs for the duration of construction, usually 6–12 months (most lenders cap this at 24 months). Once the build is complete and a final valuation has been carried out, the loan converts to a standard principal and interest (P&I) schedule.
What Lenders Require to Approve a Construction Loan
Construction loans have stricter documentation requirements than standard mortgages. Here's what most lenders need:
- Fixed-price building contract — signed and dated with your registered builder. Cost-plus contracts are rarely accepted by mainstream lenders.
- Council-approved plans and building permits — all permits must be in place before loan approval is finalised.
- Registered builder with Domestic Building Insurance (DBI) — your builder must hold current DBI and be registered with the Victorian Building Authority (VBA).
- Land ownership or simultaneous settlement — most construction loans require the land to be settled before or at the same time as the first drawdown.
- Acceptable loan-to-value ratio (LVR) — calculated on the completed property value, not just the build cost. Most lenders lend up to 80% without LMI; some go to 95% with LMI or government guarantees.
Can First Home Buyers Use a Construction Loan?
Absolutely — and the combination of a construction loan with the First Home Guarantee is one of the most powerful options available to Melbourne buyers in 2026.
Since October 2025, the First Home Guarantee has no income caps and unlimited places. It allows eligible first home buyers to build with as little as a 5% deposit and no Lenders Mortgage Insurance (LMI), with the federal government guaranteeing up to 15% of the loan value. For new builds in Melbourne and Geelong, the property price cap is $950,000 (land + total build cost combined).
STAMP DUTY SAVING: In Victoria, stamp duty is paid on the land component only when building — not on the construction contract. On a $400,000 land purchase, this can save Melbourne buyers $15,000–$25,000 compared with buying a comparable established home at the same total value.
Building vs. Buying Established: A Quick Comparison
| Factor | Construction Loan | Buying Established |
|---|---|---|
| Loan structure | Progressive drawdown, interest-only during build | Full amount at settlement, P&I from day one |
| Timeline to move in | 12–18 months (build) + hold costs | 30–90 days to settlement |
| Stamp duty | Land value only — significant saving | Full purchase price |
| Design control | Full — choose your own layout & finishes | Limited to existing property |
| Builder warranty | Up to 10 years (structural defects) | No warranty on existing structure |
Working With a Broker on Your Construction Loan
Construction loans involve more moving parts than a standard purchase: lender timelines, drawdown scheduling, builder payment coordination, and often a land loan running simultaneously during the early stages. It's also worth comparing refinancing options once your build is complete — a fully completed property often unlocks better rates.
Working with an experienced broker means:
- Access to lenders that accept your builder and contract type
- Someone managing each drawdown so your builder is never waiting on funds
- Upfront structuring that keeps your holding costs to a minimum
- A clear plan to optimise your loan once the build is finished
For builder registration requirements, refer to the Victorian Building Authority. For current construction loan rates tailored to your situation, contact IFG directly — rates vary by lender and change regularly.
Ready to Build? Let's Talk Strategy First.
Whether you've found land already or are still comparing options, speaking with a broker before you sign anything can save you thousands. IFG will compare construction lenders, check your scheme eligibility, and manage every drawdown — at no cost to you.
Book a free consultation or call 0401 333 636
This article is general information only and does not constitute financial or credit advice. Construction costs and scheme details are indicative and subject to change. Brian Hermosilla (CR 485802) and Frank Marin (CR 486546) are Credit Representatives of BLSSA Pty Ltd ABN 69 117 651 760, Australian Credit Licence 391237. Both are proud members of the Mortgage & Finance Association of Australia (MFAA). Please speak with a qualified mortgage broker to assess your individual circumstances.