The easiest way to fund a house and land package

How construction finance works for house and land packages

A construction loan releases funds in stages as your home is built, rather than handing over the full amount at settlement. The lender will only charge interest on the amount drawn down at each stage, which means your repayments start lower and increase as more funds are released. Most lenders require a registered builder and a fixed price building contract before approving the loan, and they'll arrange inspections at each stage to confirm work is complete before releasing the next payment.

Consider a buyer in Altona purchasing a house and land package near Cherry Lake. They've found suitable land and signed a fixed price contract with a project home builder. The lender approves a land and construction package, releases the first drawdown to settle the land, then releases further amounts as the slab is poured, the frame goes up, the roof is fitted, and finally at completion. At each stage, an inspector confirms the work before the next payment is made.

The structure protects both you and the lender. You're not paying interest on money that hasn't been spent yet, and the lender knows funds are only released when there's something tangible on the ground. Most lenders charge a Progressive Drawing Fee to cover the cost of inspections, typically a few hundred dollars per drawdown.

What's included in a land and build loan

A land and build loan covers both the purchase of the land and the cost of construction under a single approval. The lender assesses your borrowing capacity based on the combined value, and you'll usually need a deposit of at least 10% of the total project cost. Some lenders will accept the land itself as part of your deposit if you already own it, which can reduce the cash you need upfront.

The loan amount is split across a progress payment schedule that matches your building contract. A typical schedule includes five or six stages: land settlement, slab down, frame up, lock-up, fixing, and practical completion. Each payment is a percentage of the total contract price, and your builder will request each payment as they reach the relevant milestone. Your lender will send an inspector to confirm the work before releasing funds directly to the builder.

If you're buying in Altona, where land close to the beach or Pier Street village commands a premium, your deposit requirement will reflect the combined land and construction cost. For example, a package with a higher land value may push your deposit needs up, even if the build itself is a standard design.

The difference between fixed price contracts and cost plus contracts

Most lenders will only approve construction finance if you're building under a fixed price building contract. This type of contract locks in the total build cost upfront, which gives the lender certainty about the final loan amount and makes it easier for you to budget. The builder agrees to deliver the home for a set price, and any cost overruns are their responsibility, not yours.

A cost plus contract, where you pay the builder's costs plus a margin, is harder to finance because the final price isn't known at the start. Lenders see this as higher risk, and many won't approve loans on this basis unless you're an experienced owner builder with significant equity. If you're considering owner builder finance, expect stricter lending criteria and a larger deposit requirement.

How the construction draw schedule works in practice

The construction draw schedule sets out when and how much money is released at each stage of the build. Your builder will invoice the lender at each milestone, and the lender will arrange a progress inspection to confirm the work has been completed to the required standard. Once the inspector signs off, the lender releases the payment directly to the builder, minus any retention amount.

Retention is a small percentage of each payment, usually around 5%, that the lender holds back until the final stage. It's a safeguard to make sure the builder completes all defect work and hands over a finished home. At practical completion, the retention is released along with the final drawdown.

Timings matter. Most lenders require you to commence building within a set period from the Disclosure Date, often six to twelve months. If you don't start on time, your loan approval may lapse and you'll need to reapply. In Altona, where council approval and development application processes can take a few months, it's worth factoring in the timeline before signing contracts.

What about interest-only repayment options during construction

During the construction phase, most lenders offer interest-only repayment options. You only pay interest on the funds that have been drawn down so far, which keeps your repayments manageable while the build is underway. Once construction is complete, the loan converts to a standard home loan with principal and interest repayments, though you can often choose to stay on interest-only for a set period if that suits your situation.

This structure is useful if you're renting while you build, as it means you're not paying a full mortgage and rent at the same time. In Altona, where rental demand near the train station and foreshore is strong, many buyers in this position stay local during construction to keep their commute consistent.

Interest rates on construction loans are typically similar to standard variable rates, though some lenders charge a slightly higher rate during the construction phase. Once the build is finished and the loan converts, you can usually switch to a fixed or split rate arrangement if you prefer.

Requirements for council approval and registered builders

Lenders require council approval and building permits to be in place before they'll release the first drawdown. Your builder will usually handle the council plans and development application, but it's your responsibility to make sure everything is approved before settlement. If there are delays, your loan approval timeline may be affected.

You'll also need to use a registered builder with appropriate insurance. Lenders won't approve construction finance for owner builders unless you have significant building experience and a larger deposit. The builder's insurance, often called domestic building insurance or home warranty insurance, protects you if the builder goes broke or fails to complete the work.

In Altona, where local builders are familiar with Hobsons Bay council requirements, the approval process is usually straightforward for standard house and land packages. Custom designs or builds on unusual blocks may take longer, so allow extra time if your project is more complex.

How this applies if you're a first home buyer

If you're a first home buyer building a new home, you may be eligible for the First Home Owner Grant and stamp duty concessions. These vary by state, but in Victoria, building a new home can offer significant savings compared to buying an established property. The grant and concessions are typically applied at land settlement, which reduces the cash you need upfront.

Your borrowing capacity for a construction loan is assessed the same way as a standard home loan, based on your income, expenses, and deposit. Lenders will also factor in the completed value of the property, which is usually higher than the construction cost because the land and build together are worth more than the sum of their parts. That additional equity can help you meet lending criteria even with a smaller deposit.

Many first home buyers in Altona are drawn to house and land packages because they offer a clear path to a brand new home without the uncertainty of renovating an older property. The suburb's proximity to Melbourne, with the train line running directly to the city, makes it a practical choice for people working in the CBD but wanting more space than an inner-city unit offers. For more detail on first home buyer options, visit our first home buyers page.

Common hold-ups and how to avoid them

Delays in council approval, changes to building plans, or disputes over progress payments can all slow down a construction project. The most common hold-up we see is when a buyer signs a building contract before securing finance, only to find the lender won't approve the loan because the contract doesn't meet their requirements. Always get loan approval before signing with a builder.

Another issue is underestimating the deposit needed. A 10% deposit might sound manageable, but when you factor in the cost of the land, the build, and additional costs like stamp duty, conveyancing, and inspection fees, the cash required upfront can be substantial. Work through the numbers with a mortgage broker in Altona before committing to a package.

If your builder requests a payment before the lender's inspector has signed off, don't agree to it. The progress payment schedule exists to protect you, and paying ahead of schedule can leave you exposed if the builder fails to complete the next stage.

Call one of our team or book an appointment at a time that works for you. We can review your borrowing capacity, connect you with lenders who specialise in construction finance, and walk you through the progress payment finance process from start to finish. Whether you're buying land in Altona or already have a block and need a build loan, we'll help you access construction loan options from banks and lenders across Australia.

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