Across Oran Park, Gregory Hills, and Leppington, new estates from Stockland and Mirvac are selling house-and-land packages faster than most buyers can process the paperwork. The land registers, the builder signs a contract, and the buyer assumes the finance will work itself out. It usually does - but only if the loan is structured correctly from the start. A construction loan is a fundamentally different product to a standard home loan, and the gap between the two catches buyers every month.
How a Construction Loan Actually Works
A standard home loan pays a single lump sum to the vendor at settlement. A construction loan works differently: the lender approves the full facility upfront, but releases funds in stages - called progress payments or drawdowns - as each stage of building is completed and certified. You only pay interest on the funds drawn at any given time, not on the full approved amount.
This matters significantly for your cash flow during the build. If your total construction loan is $600,000 and only $60,000 has been drawn at the slab stage, you are paying interest on $60,000, not $600,000. As construction progresses and each stage is drawn, your interest payments increase proportionally. This interest-only phase typically ends at practical completion, at which point the loan reverts to standard principal-and-interest repayments.
Key point
If you are renting while building, you are paying both rent and construction loan interest simultaneously. Budget for this period carefully - it is the financial pressure point most buyers underestimate.
The Five Progress Payment Stages
NSW lenders typically follow the Housing Industry Association (HIA) standard progress payment schedule. While exact percentages can vary slightly between builders and contracts, the typical structure is:
- Slab / Base (10%): Site preparation and concrete slab pour. This is the first drawdown after the land has settled.
- Frame (15%): Timber or steel frame erected and inspected.
- Lock-up (35%): External walls, roof, windows, and external doors installed - the largest single draw.
- Fitout / Fixing (25%): Internal fit-out including plasterboard, internal doors, kitchen cabinets, and rough-in plumbing and electrical.
- Practical Completion (15%): Final inspection passed, Occupancy Certificate issued, keys handed over.
Before releasing each progress payment, the lender will require an invoice from the builder and, in most cases, a valuation or inspection confirming that the stage is complete. Some lenders conduct their own inspections; others accept a builder's progress claim without an independent inspection. The difference matters: a lender that inspects independently gives you an additional layer of protection.
The Land Settlement Comes First
With a house-and-land package, the land and the construction are two separate transactions. The land settles first - often six to twelve months before construction begins - and the land loan is drawn as a standard lump sum at settlement. Once the slab is poured, the construction facility kicks in and drawdowns begin against the build contract.
This sequencing means your serviceability is assessed across the combined land and construction loan from day one. The lender will want to see that you can service the peak debt - the full land plus construction balance - not just the interest-only construction phase amount. That assessment happens at approval, before a single brick is laid.
What a Fixed Price Building Contract Must Contain
Every lender requires a signed, fixed price building contract before approving a construction loan. The contract must include the builder's full name and ABN, their NSW Fair Trading contractor licence number, the total contract price, a construction timeline with a projected completion date, and details of the builder's Home Building Compensation Fund (HBCF) insurance cover for contracts over $20,000. Without all of these elements, the lender's credit team will not proceed.
Builder due diligence
Lenders verify the builder's licence status against the NSW Fair Trading register before approval. A licence that has lapsed, been suspended, or carries conditions is an immediate obstacle. Check your builder's licence yourself at onlineservices.fairtrading.nsw.gov.au before you sign anything.
Why "Fixed Price" Is Not Always Truly Fixed
The term fixed price contract is standard in NSW residential construction, but the contract price is only fixed to the extent that the contract says it is. Two clauses routinely create exposure: prime cost (PC) items and provisional sums (PS).
A PC item is an allowance for a specific fixture or fitting - a tap set, an appliance, a tile range - where the allowance in the contract may be lower than what you actually select. If the contract allows $800 per square metre for floor tiles and you choose a $140-per-metre tile, you pay the difference directly to the builder. Across a full home fitout, PC items can add $15,000 to $40,000 above the stated contract price.
A provisional sum is an estimated allowance for work where the final cost cannot yet be determined - site earthworks are the most common example. If the site has difficult soil conditions and earthworks run over the PS allowance, that excess is a variation charged to you. Stockland and Mirvac estates are generally well-engineered, but neighbouring lots can vary significantly. A geotechnical report before signing is money well spent.
Lenders will add a construction contingency - typically 5 to 10% of the build contract - to the loan approval to accommodate variations. But if your variations exceed that buffer, you will need to fund the gap from savings or seek a loan increase, which triggers a new credit assessment.
The Completion Valuation Risk
At the time of construction loan approval, the lender commissions an "as if complete" valuation - an estimate of the property's market value once the home is built. This valuation drives the LVR calculation that determines whether you need Lenders Mortgage Insurance and how much you can borrow.
The risk: if the completed valuation at practical completion comes in below the total cost of land plus build, your effective LVR increases. In a softening market, this can mean LMI that was not anticipated at the time of approval, or a requirement to contribute additional cash at settlement. In the growth corridors of south-west Sydney, this risk has been relatively low historically, but buyers in early-stage estates where surrounding sales evidence is thin should be aware of it.
Frequently Asked Questions
Can I use a construction loan to build on land I already own?
Yes. If you own the land outright or have an existing mortgage on it, a lender will assess the construction loan against the end value of the completed property. The existing mortgage may need to be refinanced into the construction facility, or the lender may take a second mortgage during construction depending on their policy. Equity in the land can often substitute for a cash deposit against the build contract.
What happens if my builder goes insolvent during construction?
This is exactly why lenders require builders to hold Home Building Compensation Fund (HBCF) cover in NSW for contracts over $20,000. If your builder becomes insolvent, HBCF cover allows you to make a claim to complete the build. The lender will typically freeze further progress payments until a replacement builder is engaged and a new contract is in place. Always confirm HBCF cover is in force before signing a building contract - a builder's certificate of currency can be verified directly with icare NSW.
How long can I be in the construction phase before the loan reverts?
Most lenders allow 12 to 24 months of construction-phase interest-only drawdowns. If construction is delayed significantly beyond that, you may need to apply for an extension. Some lenders are more flexible than others - particularly if the delay is due to factors outside your control such as DA amendments or weather events. Your broker should document any delays proactively rather than waiting for the lender to flag it as a compliance issue.
Building in Oran Park, Gregory Hills, or Leppington?
Michael works with buyers across the Macarthur corridor on construction finance every week. Get the loan structure right before you sign the building contract.
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