When you come to buy a property, you may expect to buy one that’s been lived in previously, or to buy one off the plan from a real estate developer. However, many people dream of building their own home instead.

If you're imaginative and prepared to take a few risks, you could build your own home with the help of a construction loan.

Find and compare construction home loans

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2.64%

Variable

2.64%

Macquarie Bank

$1,367

Redraw facility
Offset Account
Borrow up to 70%
Extra Repayments
Interest Only
Owner Occupied

3.12

/ 5
More details

2.74%

Fixed - 5 years

2.68%

Macquarie Bank

$1,382

Redraw facility
Offset Account
Borrow up to 70%
Extra Repayments
Interest Only
Owner Occupied

2.63

/ 5
More details

2.68%

Variable

2.69%

Suncorp Bank

$1,373

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

3.56

/ 5
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More details

2.84%

Fixed - 4 years

2.77%

Macquarie Bank

$1,398

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

2.45

/ 5
More details

3.02%

Variable

3.05%

Yard

$1,426

Redraw facility
Offset Account
Borrow up to 90%
Extra Repayments
Interest Only
Owner Occupied

2.36

/ 5
More details

2.24%

Fixed - 2 years

3.45%

Mystery Deal

$1,307

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

3.14

/ 5
More details

2.79%

Fixed - 5 years

3.87%

NAB

$1,390

Redraw facility
Offset Account
Borrow up to 95%
Extra Repayments
Interest Only
Owner Occupied

2.82

/ 5
More details

2.17%

Variable

2.17%

Freedom Lend

$1,297

Redraw facility
Offset Account
Borrow up to 70%
Extra Repayments
Interest Only
Owner Occupied

4.59

/ 5
More details

2.19%

Variable

2.26%

Reduce Home Loans

$1,299

Redraw facility
Offset Account
Borrow up to 60%
Extra Repayments
Interest Only
Owner Occupied

4.15

/ 5
More details

2.21%

Fixed - 2 years

2.36%

Freedom Lend

$1,302

Redraw facility
Offset Account
Borrow up to 70%
Extra Repayments
Interest Only
Owner Occupied

3.76

/ 5
More details

2.31%

Fixed - 2 years

2.38%

Freedom Lend

$1,317

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

3.67

/ 5
More details

2.39%

Variable

2.39%

Freedom Lend

$1,329

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

4.10

/ 5
More details

2.39%

Variable

2.39%

Pacific Mortgage Group

$1,329

Redraw facility
Offset Account
Borrow up to 70%
Extra Repayments
Interest Only
Owner Occupied

4.03

/ 5
More details

2.44%

Variable

2.44%

Pacific Mortgage Group

$1,337

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

3.92

/ 5
More details

2.29%

Variable

2.47%

Mortgage House

$1,314

Redraw facility
Offset Account
Borrow up to 60%
Extra Repayments
Interest Only
Owner Occupied

3.96

/ 5
More details

2.44%

Variable

2.48%

Mortgage House

$1,337

Redraw facility
Offset Account
Borrow up to 60%
Extra Repayments
Interest Only
Owner Occupied

3.77

/ 5
More details

2.49%

Variable

2.49%

Reduce Home Loans

$1,344

Redraw facility
Offset Account
Borrow up to 60%
Extra Repayments
Interest Only
Owner Occupied

3.47

/ 5
More details

2.49%

Variable

2.49%

People's Choice Credit Union

$1,344

Redraw facility
Offset Account
Borrow up to 80%
Extra Repayments
Interest Only
Owner Occupied

3.55

/ 5
More details

2.49%

Variable

2.49%

Hume Bank

$1,344

Redraw facility
Offset Account
Borrow up to 70%
Extra Repayments
Interest Only
Owner Occupied

3.56

/ 5
More details

Learn more about home loans

What is a construction loan?

Simply put, a construction loan is borrowing money to build a home or investment property. Construction loans can sometimes also be used to pay for major renovations to existing properties.

Unless you already own the plot of land, your loan will need to cover its purchase price, plus the estimated cost of construction.

Just like a typical mortgage, your lender will want to be confident that the value of the property will be enough to secure the loan, based on its Loan to Value Ratio or LVR. Before your application can be approved, the lender will estimate what the value of the property will be once construction is complete, and use this to work out the mortgage’s LVR.

A construction loan will often give you a short loan term – generally around a year – to complete the build.

When the build is finished, you’ll switch to a more typical mortgage, sometimes called the “end loan”, to pay off the remaining construction costs and value of the land. You may also have the option to refinance your mortgage at the end of the construction period.

How are construction loans different from typical mortgages?

In a standard home loan, you’ll receive the money you need to buy a house and land at the start of the loan term as one lump sum. You’ll then spend the remaining loan term paying back the money you borrowed (the principal) plus interest. 

In a construction loan, the money you borrow is typically drawn down in stages as the build proceeds. So instead of receiving the money as one lump sum, you’ll draw down just what you need to lay the foundation, then to build the frame, and so on until the house is built.

Construction loans are often interest-only loans while the house is being built. Plus, interest will only be charged on the money you’ve drawn down so far, and not on the total principal. This can help to minimise your payments until construction is complete, whereupon the loan will either revert to a principal and interest loan, or you’ll need to refinance.

How does a construction loan compare to other mortgage offers?

Construction loan interest rates are likely to be higher than those of a typical mortgage. This is because the lender doesn't have a tangible asset to secure the loan; just something that’s expected to be constructed. It's hard for a lender to value this, as property prices in the neighbourhood could fall, or the builder could do a bad job.

Banks and other financial institutions may be wary of providing this type of loan, so it’s important that everyone involved is confident that the project will succeed.

What do you need for a construction loan?

  • A budget: Your lender will need to know you can not only afford the repayments during construction, but also when you revert or refinance the loan once the house is built.
  • A construction plan: Before they will approve your construction loan, your lender will want the builder’s qualifications, detailed specifications for the building, including what materials will be used, and a timescale.
  • A deposit: You may only need a smaller deposit to start construction (sometimes as little as 5% of the projected property value), however once the project is complete and you revert to a more typical mortgage, you may need to make up a deposit of 20% or more to avoid being charged Lenders Mortgage Insurance (LMI).
  • A good credit rating: Your history of borrowing and repaying money may be a factor when the lender decides whether or not to approve your loan application.

What are the risks of construction loans?

Construction projects can fall behind schedule, sometimes due to poor weather conditions, sometimes due to a builder not adhering to the project timetable. Delays can cost you money, so consider tying up everything contractually as tightly as you can, including penalty clauses for delays.

Payment stages in a construction loan:

  1. Slab: This amount is for building the foundation of your home, including the base, plumbing and waterproofing. This can be around 10 per cent of the total amount.
  2. Frame: This phase is where your builder will focus on constructing the ‘frame’ of your home including the windows, roofing and some brickwork. This can be around 15 per cent of the total amount.
  3. Lock up: This is usually around 35 per cent of the loan and covers the elements that are needed to ‘lock up’ your home. This can include external walls, doors and insulation.
  4. Fixing: Shelving, kitchen, bathroom cabinets, tiles, cladding and all other internal fixtures and fixings are included in this stage, and can make up around 20 per cent of the contract.
  5. Completion: As the name suggests, this is payment stages covers the completion of the building contract. Around 15 per cent of your loan will cover this, and includes all final installation pieces, including building property fences, cleaning, painting etc.

What are owner-builder mortgages?

An owner-builder mortgage works a lot like a construction loan, except rather than hiring a builder to complete the project, you handle it yourself as a DIY project. 

Owner-builder loans are more likely to have stricter eligibility criteria, such as requiring larger deposits of 40% or more, or charging higher interest rates and fees. This is because most banks consider owner-builder loans riskier than other construction loans, as they can’t be as confident that you’ll be able to successfully complete the project to a professional standard (unless you are also a qualified and licensed builder). 

Frequently asked questions

What is a construction loan?

A construction loan is loan taken out for the purpose of building or substantially renovating a residential property. Under this type of loan, the funds are released in stages when certain milestones in the construction process are reached. Once the building is complete, the loan will revert to a standard principal and interest mortgage.

What is a draw down?

The transfer of money from a lending institution to a borrower. In a typical home loan, the funds are drawn down all at once in order to buy the property. In a construction loan, the money is drawn down in several stages to pay the builders as they progress through each phase of the project. In a line of credit loan, you can draw down money up to a limit based on your loan’s available equity.

What is a loan-to-value ratio (LVR)?

A loan-to-value ratio (otherwise known as a Loan to Valuation Ratio or LVR), is a calculation lenders make to work out the value of your loan versus the value of your property, expressed as a percentage.   Lenders use this calculation to help assess your suitability for a home loan, and whether you need to pay lender’s mortgage insurance (LMI). As a general rule, most banks will require you to pay LMI if your loan-to-value ratio is 80 per cent or more.   LVR is worked out by dividing the loan amount by the value of the property. If you are looking for a quick ball-park estimate of LVR, the size of your deposit is a good indicator as it is directly proportionate to your LVR. For instance, a loan with an LVR of 80 per cent requires a deposit of 20 per cent, while a 90 per cent LVR requires 10 per cent down payment. 

LOAN AMOUNT / PROPERTY VALUE = LVR%

While this all sounds simple enough, it is worth doing a more accurate calculation of LVR before you commit to buying a place as there are some traps to be aware of. Firstly, the ‘loan amount’ is the price you paid for the property plus additional costs such as stamp duty and legal fees, minus your deposit amount. Secondly, the ‘property value’ is determined by your lender’s valuation of the property, not the price you paid for it, and sometimes these can differ so where possible, try and get your bank to evaluate the property before you put in an offer.

What is a building in course of erection loan?

Also known as a construction home loan, a building in course of erection (BICOE) loan loan allows you to draw down funds as a building project advances in order to pay the builders. This option is available on selected variable rate loans.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

What is a low-deposit home loan?

A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.

For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.

As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.

What is a guarantor?

A guarantor is someone who provides a legally binding promise that they will pay off a mortgage if the principal borrower fails to do so.

Often, guarantors are parents in a solid financial position, while the principal borrower is a child in a weaker financial position who is struggling to enter the property market.

Lenders usually regard borrowers as less risky when they have a guarantor – and therefore may charge lower interest rates or even approve mortgages they would have otherwise rejected.

However, if the borrower falls behind on their repayments, the lender might chase the guarantor for payment. In some circumstances, the lender might even seize and sell the guarantor’s property to recoup their money.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

What is breach of contract?

A failure to follow all or part of a contract or breaking the conditions of a contract without any legal excuse. A breach of contract can be material, minor, actual or anticipatory, depending on the severity of the breaches and their material impact.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor. 

How often is your data updated?

We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.

Mortgage Calculator, Repayment Type

Will you pay off the amount you borrowed + interest or just the interest for a period?

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

Why was Real Time Ratings developed?

Real Time RatingsTM was developed to save people time and money. A home loan is one of the biggest financial decisions you will ever make – and one of the most complicated. Real Time RatingsTM is designed to help you find the right loan. Until now, there has been no place borrowers can benchmark the latest rates and offers when they hit the market. Rates change all the time now and new offers hit the market almost daily, we saw the need for a way to compare these new deals against the rest of the market and make a more informed decision.

What is a debt service ratio?

A method of gauging a borrower’s home loan serviceability (ability to afford home loan repayments), the debt service ratio (DSR) is the fraction of an applicant’s income that will need to go towards paying back a loan. The DSR is typically expressed as a percentage, and lenders may decline loans to borrowers with too high a DSR (often over 30 per cent).