Getting council approval feels like the finish line when you're planning a build, but for lenders it's just one tick in a long list.
Construction finance works differently to standard home loans because the property you're borrowing against doesn't exist yet. Lenders need proof that what you're planning to build will actually get finished, on budget, and to a standard they can secure against. That means they dig into the contract, the builder, the costings, and your capacity to cover overruns in ways that catch people off guard.
If you're in Newtown looking at knocking down and rebuilding, or buying a block in the inner west for a new home construction finance project, knowing what lenders want upfront saves you from stalling halfway through the approval process.
What Lenders Actually Check Before Approving Construction Finance
Lenders approve construction loans based on fixed price building contracts, registered builders, and a detailed cost breakdown that includes every stage of the build. They won't fund cost plus contracts in most cases, and they need to see council plans stamped and approved before they'll issue formal approval. Your borrowing capacity gets assessed on the total loan amount, not just the land, and they factor in whether you can service interest-only repayments during the construction phase.
Consider someone wanting to build a custom home on a block they already own in Newtown. They've got development application approval, a builder they trust, and rough costings that put the build at around $850,000. They assume that's enough to start the construction loan application. It's not. The lender asks for a fixed price contract, not an estimate. They want proof the builder holds current insurance and licensing. They request a progress payment schedule that breaks the build into stages tied to inspections. And they want to see how the buyer plans to cover the gap between what the valuer says the completed home will be worth and what the total borrowing sits at. Without those pieces locked in, the application sits in limbo.
Why the Builder's Registration and Insurance Matter as Much as Your Deposit
Your builder needs to be registered, insured, and able to provide evidence of completed projects at a similar scale. Lenders won't release progress payments to builders who don't meet licensing requirements in New South Wales, and they'll knock back applications where the builder's insurance doesn't cover the full contract value. If you're using an owner builder arrangement, expect even tighter scrutiny and higher deposit requirements, sometimes up to 30% instead of the usual 20%.
We regularly see people in the inner west who've lined up a builder through word of mouth without checking their registration properly. It creates problems later when the lender does their own checks and finds gaps.
How the Progressive Drawdown Works and Why Timing Matters
Construction loans release funds in stages, not as a lump sum. You'll typically see four to six progress payments tied to milestones like slab down, frame up, lock-up, fixing stage, and practical completion. The lender arranges a progress inspection before each drawdown to confirm the work matches the stage being claimed. They only charge interest on the amount drawn down so far, which keeps costs lower during the build, but you need to make sure your builder's progress payment schedule aligns with what the lender will actually release.
Misalignment between what the builder wants paid and what the lender will release at each stage is one of the most common issues we see. Builders often want payment on different terms to what construction draw schedules allow, especially for things like deposits on materials or paying sub-contractors ahead of a milestone. If your contract doesn't match the lender's drawdown structure, you either renegotiate the contract or find another lender. Some lenders allow more flexibility with their progressive payment schedules, but you need to know that before you sign anything with the builder.
What Happens If the Build Runs Over Budget or Over Time
Lenders approve construction loans with an expectation that you'll commence building within a set period from the disclosure date, usually six to twelve months. If the build stalls or costs blow out beyond the approved loan amount, you're responsible for covering the gap. That's why lenders assess your savings and income against not just the contracted price, but also a buffer for variations and delays.
In a scenario like this, someone buys a block on a land and construction package in Erskineville with plans to build within twelve months. Six months in, the builder identifies drainage issues that add $40,000 to the budget. The buyer doesn't have that sitting in savings, and the lender won't increase the loan amount because the valuation was based on the original scope. The project stops until they can either find the funds, renegotiate the design to cut costs elsewhere, or walk away and wear the sunk costs. It's not a rare situation. Lenders want to see that you've got capacity to absorb variations without defaulting, which is why serviceability gets tested harder on construction finance than it does on a standard purchase.
Renovation Finance and How It Differs from New Builds
Renovation loans sit under the same construction finance umbrella but come with different conditions. Lenders want to see that the home is liveable during the work, or that you've got alternative accommodation sorted if it's not. The loan amount gets calculated based on the property's value after the renovation, but you still need a fixed price contract and a registered builder for any structural work. Cosmetic renovations under a certain threshold sometimes qualify for a standard home loan with a redraw or offset setup rather than a formal construction loan, which saves on progressive drawing fees.
If you're renovating a terrace in Newtown, which is common in the area given the housing stock, you'll likely need council approval for anything that affects the building envelope or heritage overlays. Lenders won't proceed without that approval locked in, even if the builder says they can start while it's pending.
Fixed Price Contracts and Why Cost Plus Doesn't Fly with Most Lenders
Lenders across Australia will only approve construction finance against fixed price contracts in almost all cases. A cost plus contract, where you agree to pay the builder's costs plus a margin, leaves the final price open-ended. That creates too much risk for a lender who's trying to assess whether the completed property will be worth what you owe against it. If your builder only works on cost plus terms, you'll either need to find a different builder or look for a specialist lender, and those usually come with higher interest rates and fees.
Fixed price building contracts also protect you. They force the builder to give you a detailed breakdown upfront, lock in the scope, and limit your exposure to surprise costs. Variations can still happen, but they need to be documented and agreed in writing, which keeps things clearer than a running tab.
Interest-Only Repayments During Construction and What That Actually Costs
Most construction loans default to interest-only repayment options while the build is happening. You're only paying interest on whatever's been drawn down so far, not the full loan amount, which keeps your monthly outgoings lower until the home is finished and you move to principal and interest repayments. At current variable rates, that might mean paying a few hundred dollars a month early on when only the land and slab costs have been drawn, compared to a couple of thousand later in the build.
People sometimes forget to factor in how much that interest adds up to over a twelve-month build. It doesn't get capitalised into the loan in most cases, so you're paying it out of your income or savings as you go. If your budget's already stretched, that can create pressure, especially if the build runs over time and you're covering both construction loan interest and rent somewhere else.
How Long Lenders Give You to Start Building and What Happens If You Don't
You'll usually need to commence building within six to twelve months from when the construction loan settles. If you don't, the lender can withdraw the approval or require you to reapply, which means going through the whole process again with updated financials and valuations. That deadline gets written into the loan contract, and it's firm. If you're buying land with plans to build later, you might be in a position where you need a standard land loan first, then refinance into construction finance when you're ready to start. That adds costs, but it's sometimes the only option if timing doesn't line up.
In Newtown and the surrounding inner west, land suitable for new builds is limited, so when something does come up, buyers often move quickly without having their construction plans fully locked in. That can create problems if the land settles and the lender's clock starts ticking before you've even finalised the design or chosen a builder.
Call one of our team or book an appointment at a time that works for you if you're planning a build and want to talk through what lenders will actually ask for before you get too far down the track.
Frequently Asked Questions
What type of building contract do lenders require for construction finance?
Lenders require a fixed price building contract with a registered builder. Cost plus contracts are not accepted by most lenders because the final price remains open-ended, creating too much risk for loan approval.
How do progress payments work with a construction loan?
Construction loans release funds in stages tied to milestones like slab down, frame up, and lock-up. The lender arranges a progress inspection before each drawdown and you only pay interest on the amount drawn down so far, not the full loan.
What happens if my building project runs over budget?
You're responsible for covering any cost overruns beyond the approved loan amount. Lenders assess your savings and income with a buffer for variations, but they won't increase the loan if unexpected costs arise during construction.
How long do I have to start building after my construction loan is approved?
Lenders typically require you to commence building within six to twelve months from the disclosure date. If you don't start within that timeframe, the lender can withdraw approval or require you to reapply with updated financials.
Can I use a construction loan for renovating an existing property?
Yes, renovation loans fall under construction finance but require the home to be liveable during work or proof of alternative accommodation. You'll still need a fixed price contract and registered builder for structural work, plus council approval for significant changes.
