Things We Wish Every Borrower Knew Before Building Their Dream Home
How to Choose the Right Home Loan for Building a House
Building your dream home is exciting—but choosing the wrong construction loan can quickly turn that excitement into stress.
At Nexus Loans, we've helped hundreds of Australians finance new builds, knockdown rebuilds, house and land packages, and major renovations. One thing we've learnt is that not all construction loans are the same.
The lender with the lowest interest rate isn't always the best lender for your build.
The right lender is the one that understands your project, your builder, and your long-term goals.
In this guide, we'll explain how construction loans work, what to look for, and the biggest mistakes to avoid before you start building.
Let's Be Honest...
Building a home is very different from buying an established property.
Instead of one settlement, there are multiple progress payments.
Instead of moving in straight away, you're relying on builders, councils, weather, and timelines.
That means choosing the right lender is just as important as choosing the right builder.
What Is a Construction Loan?
A construction loan is designed specifically for building a new home or completing major renovations.
Unlike a standard home loan, your lender doesn't provide all the money upfront.
Instead, funds are released to your builder in stages, known as progress payments, as construction progresses.
This means you're generally only charged interest on the funds that have been drawn down, rather than the full loan amount from day one.
Is a Construction Loan Right for You?
Construction loans can be used for:
Building a new home
House and land packages
Knockdown rebuilds
Major structural renovations
Dual occupancy projects
Some modular and prefabricated homes
Each lender has different policies, so it's important to understand which loan best suits your project.
How Progress Payments Work
Rather than receiving one lump sum, construction loans are usually paid to your builder in stages.
These stages commonly include:
Deposit
Base/Foundation
Frame
Lock-Up
Fixing
Practical Completion
Before each payment is released, your lender may confirm the relevant stage has been completed.
Understanding how progress payments work can help you better manage your cash flow throughout the build.
Not Every Construction Loan Is the Same
This is one of the biggest misconceptions we see.
Many people compare only the interest rate.
But construction loans can differ significantly when it comes to:
Maximum borrowing limits
Deposit requirements
Interest-only options during construction
Progress payment processes
Valuation requirements
Builder approval requirements
Offset account availability
Loan features after construction is complete
Choosing the wrong lender can result in unnecessary delays, additional paperwork, or a loan that no longer suits your needs once the build is finished.
What Should You Look for in a Construction Loan?
1. A Lender That Understands Construction
Construction lending is specialised.
Some lenders process progress payments quickly, while others can take considerably longer.
Delays in payments can impact your builder's schedule and potentially slow down construction.
2. Flexible Progress Payments
Some projects require variations or changes during construction.
It's important to understand how your chosen lender handles:
Variations
Cost increases
Builder invoices
Additional valuations
3. Interest-Only During Construction
Many lenders allow interest-only repayments while your home is being built.
Because you're only paying interest on the funds that have been drawn down, repayments are often lower during construction than they will be once the home is complete.
4. Offset Accounts
An offset account can help reduce the interest charged on your home loan while keeping your savings accessible.
Not every construction loan offers offset facilities, so it's worth considering if this feature is important to you.
5. Future Flexibility
Think beyond the build.
Ask yourself:
Can I refinance easily later?
Can I split my loan?
Can I access equity in the future?
Does this lender suit my long-term goals?
Your construction loan should continue working for you long after you've moved into your new home.
The Biggest Mistakes We See
Choosing the Lowest Interest Rate
The cheapest rate isn't always the cheapest loan.
Construction experience, turnaround times, loan features, and flexibility can all make a significant difference.
Not Allowing a Contingency Budget
Building costs can change.
Many clients forget to allow for:
Site costs
Landscaping
Fencing
Driveways
Window furnishings
Variations
Unexpected expenses
Having a financial buffer can reduce stress later in the project.
Changing Jobs Mid-Build
Changing employment during construction may affect future lending or refinance options.
If you're considering a career move, speak with your broker first.
Making Changes After Signing the Building Contract
Variations can increase costs and sometimes require additional lender approval.
Understanding this process before construction starts can save time and frustration.
Should You Get Pre-Approval Before Building?
Absolutely.
A construction pre-approval helps you understand:
Your borrowing capacity
Your budget
What lenders are likely to approve
Any conditions you may need to meet before signing contracts
This gives you confidence before committing to land or a building contract.
House and Land Package vs Custom Build
Both options have advantages.
A house and land package may offer a simpler process with fixed inclusions.
A custom build provides greater flexibility but often requires more planning, decisions, and budgeting.
The right option depends on your lifestyle, budget, and long-term plans.
Common Questions We Get Asked
Can I build with a 5% deposit?
Potentially. Some eligible borrowers may be able to build with a smaller deposit through certain lenders or government schemes, depending on their circumstances.
Do I pay my mortgage while the house is being built?
Usually, yes—but during construction you'll generally only make repayments on the funds that have already been drawn down, rather than the full loan amount.
What happens if my build goes over budget?
This depends on the reason for the increase and your lender's policy. It's one of the reasons we recommend including a contingency buffer in your budget.
Can I use equity instead of savings to build?
In some cases, yes. Homeowners with sufficient available equity may be able to use it towards construction, subject to lender approval.
Can I choose my own builder?
Generally, yes, provided your builder meets the lender's requirements and the building contract satisfies their lending criteria.
Can I build an investment property?
Yes. Many lenders offer construction loans for investment properties, although lending policies and loan structures may differ from owner-occupied builds.
Why Use a Mortgage Broker for a Construction Loan?
Construction finance is more complex than a standard home loan.
At Nexus Loans, we compare a wide range of lenders to find one that suits your build—not just today's interest rate.
We help you understand:
Construction loan options
Borrowing capacity
Progress payments
Interest-only options
Government schemes
House and land packages
Knockdown rebuilds
Major renovations
Most importantly, we'll help you choose a lender that fits your long-term goals, not just your construction phase.
Final Thoughts
Building a home is one of the biggest financial decisions you'll ever make.
Choosing the right construction loan isn't just about securing finance—it's about giving yourself the best possible experience from the day construction begins until the day you receive the keys.
The right advice early in the process can make all the difference.
Ready to Build Your Dream Home?
Whether you're building your first home, upgrading, investing, or planning a knockdown rebuild, the team at Nexus Loans is here to guide you through every stage of the construction finance journey.
Book your free construction loan strategy session today and let's build your future together.
