Top tips to fund land purchase for home construction

Buying land and building a custom home in San Remo

When you purchase land with the intention to build, you need a construction loan structured to release funds progressively as the build advances. Most lenders will assess both the land purchase and the construction contract together, meaning you need council approval and a registered builder before settlement on the land itself.

San Remo sits at the gateway to Phillip Island, with land parcels ranging from coastal blocks near the jetty precinct to larger acreage blocks inland toward Bass. The coastal location brings specific considerations around development applications, particularly if you're building near the foreshore or within heritage overlay areas. Lenders will want to see council plans approved before they commit to funding, and delays in council approval can push out your construction start date.

Consider a buyer who purchases a block in San Remo for land and construction as a package. They secure a fixed price building contract with a registered builder for a custom design that suits the sloping site. The lender approves the total loan amount based on the land value plus the contracted build cost. At settlement, the buyer draws down the portion needed to pay the vendor for the land. The remaining loan amount sits undrawn until construction begins, meaning they only pay interest on the land component during the approval and site prep phase. Once the slab goes down, the builder submits the first progress claim, and the lender releases the first construction drawdown after a progress inspection confirms the stage is complete.

How progressive drawdowns work with land purchase

You draw down the land portion at settlement, then the construction portion releases in stages as the build progresses. Lenders typically structure construction funding in five to six stages, aligned with the builder's progress payment schedule. Each drawdown requires a progress inspection by the lender's appointed valuer or inspector before funds release to the builder.

The schedule usually follows these stages: base stage after slab and framing, lock-up stage once the roof and external walls are complete, fixing stage when internal linings and services are installed, practical completion when the building is habitable, and final completion after defects are rectified. The builder invoices for each stage, the lender arranges an inspection, and once verified, the funds transfer directly to the builder. During construction, you only pay interest on the amount drawn down so far, not the full loan amount. Some lenders charge a progressive drawing fee at each stage, typically between $300 and $500 per drawdown, which adds to the upfront costs you need to budget for.

What lenders assess before approving land and build finance

Lenders assess your income and expenses, the land valuation, the building contract, and the builder's credentials. The land must be suitable for construction, meaning it has town planning approval or can reasonably obtain it, and services such as water, sewerage, and electricity are accessible. If you're buying rural land outside San Remo township, lenders will want confirmation that septic and water bore or tank systems meet council requirements.

The building contract must be a fixed price contract with a registered builder. Lenders will not fund cost plus contracts or owner builder projects under standard construction loan products, though some specialist lenders offer owner builder finance with higher deposits and interest rates. The builder needs to hold current registration and adequate insurance, and the contract should specify a progress payment schedule that aligns with the lender's drawdown stages. If there's a mismatch between what the builder expects and what the lender will release, you may need to cover the gap with your own funds or negotiate adjustments to the contract.

Why the construction start date matters for loan approval

Most construction loans require you to commence building within a set period from the disclosure date, typically six to twelve months. If construction does not start within that window, the lender may reassess your application or withdraw the approval. This timeline can catch buyers who underestimate how long council approval takes, particularly in areas like San Remo where coastal and environmental overlays add layers to the development application process.

In our experience, buyers who purchase land without a builder locked in often face delays that push them beyond the lender's construction start window. The solution is to engage a builder early, ideally before you settle on the land, and work through the council plans in parallel with your finance application. That way, when the land settles, you're ready to start within the lender's timeframe. If delays occur due to weather, builder availability, or council amendments, contact your broker as soon as possible to request an extension from the lender before the deadline passes.

Interest-only repayments during the construction phase

During construction, most lenders offer interest-only repayment options, meaning you pay interest on the drawn amount each month without repaying principal. Once construction reaches practical completion, the loan converts to a standard home loan with principal and interest repayments, or you can continue interest-only if that was negotiated upfront.

Interest-only during construction keeps your monthly commitments lower while you're potentially paying rent elsewhere or managing other holding costs. Once the build is complete and you move in, the loan transitions to a construction to permanent loan structure without needing to refinance or reapply. The construction loan interest rate is typically variable during the build, though some lenders allow you to lock in a fixed rate once construction is complete. Discuss the end structure at the outset so you know what your repayments will look like once you take occupancy.

How to structure your deposit for land and construction

Your deposit applies to the total project cost, which is the land price plus the building contract value. Lenders typically require at least a 10% deposit, though some will lend with 5% if you pay lenders mortgage insurance. The deposit must come from genuine savings, equity in another property, or a family guarantee. Gifted funds are acceptable with most lenders if accompanied by a statutory declaration from the donor.

If you're using equity from an existing property, the lender will assess the combined loan-to-value ratio across both securities. That means if you own a home in Coronet Bay and want to use equity to purchase land and build in San Remo, the lender looks at the total debt against the combined value of both properties. You'll need enough equity to cover the deposit and still stay within the lender's maximum LVR, usually 80% to avoid mortgage insurance or 90% if you're prepared to pay it.

Choosing between house and land packages or custom builds

House and land packages offered by developers come with pre-approved designs and fixed price building contracts, which makes the finance application more straightforward. The land is titled, the builder is locked in, and council approval is often already in place. Lenders view these as lower risk, and the process from application to settlement is typically faster.

Custom home builds give you full control over design and materials but require more upfront work to satisfy lender requirements. You need to engage an architect or draftsperson, submit plans for council approval, then obtain quotes and lock in a registered builder with a fixed price contract. The finance application takes longer because the lender's valuer needs to assess the proposed build, not just the land. If you're building a home that's unusual for the area, such as a multi-storey design on a coastal block in San Remo, the valuer may apply a conservative end value, which affects how much the lender will advance.

Paying sub-contractors and managing variations

Under a fixed price building contract, the builder is responsible for paying sub-contractors including plumbers, electricians, and other trades. The lender releases funds to the builder at each stage, and the builder manages payments from there. You should never be asked to pay sub-contractors directly unless the contract specifies otherwise or the builder becomes insolvent.

Variations to the building contract, such as upgraded fixtures or changes to the floor plan, increase the total build cost. If the variation is significant, you may need to contribute additional funds because the lender has already approved a set loan amount based on the original contract. Minor variations are usually absorbed within the builder's contingency, but any change over a few thousand dollars should be discussed with your broker to confirm whether it affects your funding structure.

What happens if the build goes over budget or over time

If the build costs more than the contracted amount due to variations or unforeseen site conditions, you need to cover the shortfall with your own funds or request a loan increase from the lender. A loan increase requires a revaluation and reassessment of your financial position, which takes time and may not be approved if your circumstances have changed or the lender's end valuation does not support the higher amount.

If the build takes longer than expected, you continue paying interest on the drawn amount for the extended period, and if you're renting elsewhere, those holding costs add up. Most fixed price contracts include a build timeframe, and penalties or extensions should be detailed in the contract. Communicate with your builder regularly to stay informed about progress, and notify your broker if delays look likely to push the completion date beyond the original estimate. Some lenders have a maximum construction period, typically twelve to eighteen months, and if the build exceeds that, they may require an explanation or review.

For construction finance tailored to your land purchase and build project in San Remo, call one of our team or book an appointment at a time that works for you. We can walk you through the council approval process, match you with lenders who understand coastal builds, and structure the drawdowns to align with your builder's schedule.

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