What are Construction Loans for Land Purchase?

What a Construction Loan Actually Covers

A construction loan lets you purchase land and then build a home on it, with the money released in stages as the build progresses. Instead of getting all the funds upfront like a standard home loan, the lender advances the money through a progressive drawdown tied to specific milestones in the build.

This matters when you're buying a block in Dulwich Hill because land prices around the inner west are steep, and most buyers need to borrow for both the land and the build itself. You'll usually end up with two separate loan splits: one for the land that settles when you take ownership, and another for the construction component that gets released progressively. During the build, you're only charged interest on what's been drawn down so far, which keeps the repayments manageable while you're still waiting to move in.

How the Drawdown Schedule Ties to Your Builder

Your lender will release funds according to a progress payment schedule, which is tied directly to your building contract. Most fixed price building contracts break the construction into five or six stages - typically things like slab down, frame up, lock-up, fixing stage, and practical completion. Your builder submits a claim at each stage, the lender arranges a progress inspection, and if everything checks out, they release that portion of the loan amount.

Consider someone buying a 300-square-metre block near Dulwich Hill Station with a fixed price contract for a two-storey terrace. The land settles first, funded by the land portion of the loan. When the slab goes down a few months later, the builder claims the first progress payment - maybe 15% of the build cost. The lender sends an inspector, confirms the slab is done, and transfers that amount to the builder. This repeats at each stage until practical completion, when the final payment goes through and the loan converts to a standard home loan with principal and interest repayments.

The Bit Most People Miss About Approval

You need council approval and a registered builder before a lender will formally approve a construction loan. That means if you're buying land in Dulwich Hill, you can't just submit a loan application with a vague idea of what you want to build. You'll need council plans, a development application that's been approved or at least submitted, and a signed contract with a licensed builder.

In practice, this often means you need to buy the land first - either with cash or a land loan - then get the plans done and approved, then apply for construction funding. Some lenders will give conditional approval based on draft plans, but they won't release funds until council approval comes through and you've signed a fixed price building contract. If you're going with a cost plus contract instead, expect fewer lenders to touch it, and the ones that do will want a bigger deposit.

What It Costs Beyond the Build Price

On top of the build itself, expect to pay a Progressive Drawing Fee each time the lender releases funds. This usually sits around $300 to $400 per drawdown, and with five or six stages, that's $2,000 or so across the project. You'll also have the usual settlement costs when you buy the land - stamp duty, conveyancing, potentially lender fees - plus the cost of getting your plans drawn up and your development application lodged with Inner West Council.

If you're an owner builder, the fees go up and the lender options shrink. Most banks won't lend to owner builders at all, and the ones that do will charge a higher construction loan interest rate and ask for a larger deposit. The logic is that without a registered builder carrying insurance and accountability, the lender's risk goes up if something goes wrong mid-build.

Interest-Only Repayments During the Build

While construction is happening, lenders typically offer interest-only repayment options on the amount drawn down so far. You're not repaying any principal during this period - just covering the interest on whatever's been released. Once the build finishes and you get your occupancy certificate, the loan converts to a standard principal and interest home loan, or you can keep it interest-only if the lender allows and it suits your situation.

This structure keeps your repayments lower while you're potentially still paying rent somewhere else or juggling other costs related to the build. You're only paying interest on $150,000 after the first couple of stages, not the full $500,000 build cost, which makes a real difference when you're months away from moving in.

Timeline Conditions You Need to Watch

Most construction loan approvals come with a condition that you commence building within a set period from the Disclosure Date - usually six or twelve months. If you don't start within that window, the approval lapses and you'll need to reapply. That can be a problem if council approval drags on or your builder's schedule shifts.

In Dulwich Hill, where blocks are often narrow and builds can be complex, it's not unusual for council to take four or five months to approve plans, especially if there's any heritage overlay or if neighbours lodge objections. Factor that into your timeline before you commit to a land purchase, because sitting on land you own while waiting for approvals means you're paying interest on the land loan without the build even starting.

Choosing Between a Project Home and Custom Design

If you're going with a project home from a volume builder, your construction loan application will usually move faster because the plans are standardised and council approval is more predictable. Lenders like the certainty of a fixed price building contract with a large registered builder who's done the same design dozens of times.

If you're doing a custom design - which is common in Dulwich Hill given the area's character and the mix of narrow blocks and heritage considerations - expect the process to take longer and the lender to scrutinise the plans more closely. Custom builds often mean cost plus contracts or builders who are smaller and less familiar to the lender's credit team, which can limit your options or push the interest rate up slightly. That doesn't mean you shouldn't do it, just that you need to allow more time and potentially a bigger deposit to make it work.

When Renovations Cross Into Construction Territory

If you're buying a block with an old cottage you plan to knock down and rebuild, that's still a construction loan, not a renovation loan. Even if you're keeping the front wall for heritage reasons and rebuilding everything behind it, most lenders will treat it as new home construction finance rather than a home improvement loan.

The distinction matters because renovation loans usually have simpler approval processes and don't require the same level of documentation around council plans and progress payment schedules. Once you're talking about a full rebuild or a substantial addition that involves new foundations and structural work, you're in construction loan territory, and that means progress inspections, drawdown schedules, and all the rest.

What Happens If the Build Goes Over Budget

If your builder claims the project is going to cost more than the original fixed price contract - or if you're on a cost plus contract and the costs blow out - the lender won't automatically increase your loan amount. You'll need to cover the difference yourself, either from savings or by applying for a top-up, which means another credit assessment and potentially another valuation.

This is one reason lenders prefer fixed price contracts. The contract price is locked in, so the builder wears the risk if materials or labour cost more than expected. With a cost plus contract, that risk sits with you, and the lender knows that if you run out of money halfway through, they're left with an incomplete build and a valuation problem.

Call one of our team or book an appointment at a time that works for you. We'll go through what you're planning to build, what the land's going to cost, and how the drawdown schedule lines up with your builder's contract so you know exactly what to expect before you commit.

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