Top Strategies to Get Your Construction Loan Approved

Construction loan approval depends on two things: whether you can afford the repayments, and whether your build plan holds up under a lender's scrutiny.

If you are planning to build in Cowes on Phillip Island, you are really asking one question. What do I need in place before I apply, so the lender says yes the first time? This article answers that.

What Do Lenders Look at in a Construction Loan Application?

Lenders assess your ability to repay the loan, the value of the land and the finished home, and the building contract. Your borrowing capacity is tested the same way as for any home loan, and the build itself is an extra layer of checking.

Australian banks must assess new borrowers at an interest rate at least 3 percentage points above the loan's rate, and the Australian Prudential Regulation Authority confirmed this buffer remained in place in May 2026. Lenders also tend to discount less stable income such as overtime and bonuses by at least 20 per cent. If part of your pay comes from overtime, expect it to count for less than you might hope.

One point works in your favour. The Australian Prudential Regulation Authority's debt-to-income limit does not apply to finance for building new dwellings. That limit applies to a bank's overall lending, not to you personally, and the exemption does not remove the repayment test above. You can check where you stand with our borrowing capacity page before you sign anything.

How Does a Fixed Price Building Contract Affect Approval?

A fixed price building contract gives the lender a clear total cost to lend against, which usually makes assessment more straightforward. A contract that leaves costs open, such as a cost plus arrangement, gives the lender less certainty and may attract more questions.

Lenders commonly ask for a signed building contract, plans and permits, and the exact requirements vary by lender. Your builder's price also needs to line up with the lender's valuation of the finished home. If the valuation comes in lower than expected, you may need to contribute more of your own money. The trade-off with a fixed price contract is that changes you request later can add to the price, and you would need to fund any variation.

Progress Payments and Drawdowns: How the Money Is Released

A construction loan is paid out in stages as the build advances, rather than as one lump sum. Many lenders charge interest on the amount drawn, so repayments can start small and grow as the build progresses. However, the repayment type and timing during the build vary by lender, so confirm them in writing.

New South Wales Government guidance notes that borrowers financing a project home start repayments once the first progress payment is made. Lender terms, such as the number of drawdowns, inspection requirements and fees, differ between lenders, so check these before choosing one.

In Victoria, the Domestic Building Contracts Act 1995 limits the deposit to 5 per cent for contracts of $20,000 or more. Payments are made for completed stages. For a contract covering all stages, the usual schedule is 10 per cent at base, 15 per cent at frame, 35 per cent at lock-up and 25 per cent at fixing. Consumer Affairs Victoria advises that a different schedule needs legal advice. It also advises that insurance may not cover work paid for before it is completed. Lenders commonly require a progress inspection or valuation before releasing a payment. Whether one is required, who arranges it and who pays the fee vary by lender, so confirm these before choosing one.

An Example: Testing the Repayments Before You Build

Consider a couple building a home in Cowes who want to know what the first drawdowns will cost. This example is illustrative only and uses a rate of 6.75% p.a., not a current offer.

Suppose the couple draws $100,000 in the first stage. Interest on that amount at 6.75% p.a. is $6,750 a year, or about $562 a month. By the time they have drawn $400,000, interest alone at the same rate is $27,000 a year, or $2,250 a month. These figures cover interest only and do not include fees or the principal and interest repayments that follow at completion.

The couple's broker checks their budget against the higher figure from day one, not just the first stage. They find that rent on their current home would overlap with early repayments for several months, so they set aside a buffer before applying. Planning ahead helps you avoid surprises when repayments rise. You can use a repayment calculator to run your own numbers, and a broker can model the overlap with your current housing costs.

Can the First Home Owner Grant Help You Build in Cowes?

The First Home Owner Grant in Victoria is $10,000 for a new home valued up to $750,000. The grant applies to eligible first home buyers who buy or build a new home valued up to $750,000 to live in. Check the State Revenue Office for the full eligibility rules, including the occupancy requirement.

If you are a first home buyer, our first home buyers page explains how a grant sits alongside your loan. The Australian Government 5% Deposit Scheme can also support a house and land package, or vacant land with a separate building contract. Where the land and build are under separate contracts, the combined cost must be within the scheme's price cap. The trade-off is that a lower deposit generally means a larger loan, so repayments and total interest will be higher. Scheme rules and price caps can change, so check Housing Australia's website.

Tax Points for Investors Building New

If you are building to rent out, the tax treatment of interest during the build matters. The Australian Taxation Office states that interest on money borrowed for construction can be claimed, while holding costs on vacant land, including interest on the land loan, cannot be claimed while the land remains vacant.

Where one loan funds both the land and the build, the interest must be split between the two purposes. Capital works deductions are generally 2.5 per cent a year for 40 years for residential buildings started after 15 September 1987, and claims start only once construction is complete.

The Australian Government states that new builds can continue to be negatively geared. However, whether a land purchase plus a separate build contract qualifies after 12 May 2026 has not been confirmed. From 1 July 2027, investors in new builds can choose between the existing 50 per cent capital gains tax discount and the new arrangements, which include a minimum 30 per cent tax rate on capital gains. These are general statements only, so get advice from a tax adviser before buying land. Our investment loans page covers the lending side.

Steps to Take Before You Apply

The strongest applications arrive with the plans, the contract and the budget already lined up. Speak to a broker before you sign a building contract, because your finance needs to suit the contract, not the other way around.

A broker can compare construction options from lenders across Australia and explain how each handles drawdowns, interest during the build and the move to a standard home loan. Our construction loans page outlines how we work with builders and lenders. We also work with Cowes locals through our Cowes mortgage broker service.

Call one of our team or book an appointment at a time that works for you, and we will map out your construction loan approval before you commit to a builder.

Frequently Asked Questions