A construction loan pays your builder in stages, so you only pay interest on the amount drawn so far, although you are approved for the full loan amount. That one feature changes how your repayments, your paperwork and your timing work compared with a standard home loan.
This guide is for Peel residents who own land, or are about to buy it, and want to build. We will walk through how staged payments work, how they affect your repayments, and what to check in your building contract before you apply.
How Does a Construction Loan Work for Building a Home?
A construction loan releases money in steps as each stage of your build is finished, rather than as one lump sum. Your lender pays the builder against each progress claim, and interest is charged on the amount drawn so far.
The usual stages are slab or base, frame, lock-up, fixing and completion, though your contract sets the exact schedule. Lenders commonly require some form of progress inspection or valuation, and fees may apply. Inspection requirements, fees and the number of drawdowns differ between lenders, so ask about them early.
Our construction loans page explains the options we can compare for you across banks and lenders in Australia.
What Will My Repayments Look Like During the Build?
During a build your repayments are usually based on the amount drawn, so they start small and rise as more of the loan is used. Some lenders offer interest-only repayments on the drawn amount during construction, then move the loan to principal and interest. Confirm the terms, construction time limit and any fees with your lender.
The trade-off is that interest-only repayments do not reduce what you owe. When principal and interest begins, the repayments are spread over a shorter remaining term, so they are higher than the same loan would have been if you had started repaying principal on day one.
As an illustrative example only, using a rate of 6.75% p.a., a drawn balance of $200,000 costs about $1,125 a month in interest-only repayments ($200,000 x 6.75% / 12). If the drawn balance later reaches $500,000, interest alone would be about $2,813 a month at the same rate. You can test your own numbers with our mortgage repayment calculator.
Fixed Price Building Contract: Why Lenders Care
A fixed price building contract gives your lender a clear total cost, which makes the loan amount easier to assess. Lenders usually ask for the building contract, plans and approvals, and builder details. Requirements differ, so confirm them with your lender.
The trade-off is that changes you ask for after signing, called variations, usually cost extra and may need extra funds. If you expect to change fittings or layouts, build a buffer into your budget. In WA, the deposit and progress payment limits in the Home Building Contracts Act apply to fixed price home building work contracts, and cost plus contracts are only subject to some of its provisions. Speak to us before you sign a cost plus contract.
Consider a Couple Building on Their Own Block
As an example, consider a couple in Peel who already own their land and want a new home built by a registered builder. Their contract has a progress payment schedule with five claims, and they plan to keep renting until the home is finished.
The solution is to set up the loan before signing. We would compare lenders on their drawdown process, inspection steps and interest-only options during construction. We would also check that the loan amount covers the contract plus a buffer for variations, and that their income is enough to meet repayments at the higher rate lenders use when they test borrowing power.
The outcome is a loan where each claim is paid on time, interest builds up only on the money used, and the couple know in advance when principal and interest will begin. They also know their cash buffer is there if the builder asks for a variation.
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Book a chat with a Finance Specialist at Clearwater Finance today.
Building Contract Rules That Affect Your Payments
In WA, the Home Building Contracts Act 1991 limits deposits to 6.5% for contracts valued from $7,500 to $500,000. Progress payments must be for work already done or materials already supplied.
The builder must also take out home indemnity insurance and give you a certificate before asking for any payment. Check this before your first payment goes out, because you shouldn't pay the builder until the certificate is in place. Ask your lender whether it also needs to see it. If a builder asks for money ahead of the work, raise it with us and seek advice before paying.
Can I Get a First Home Owner Grant When Building?
WA offers a $10,000 First Home Owner Grant for eligible new homes, and for transactions from 7 May 2026 the value cap is $800,000 south of the 26th parallel. The cap applies to eligible transactions, so check the rules for your contract structure.
Eligibility depends on your circumstances and your contract. Check the current rules with the relevant WA government agency before relying on the grant in your budget. Because the grant timing may sit alongside your first drawdown, we can help you plan when funds arrive.
Do Owner Builders and Investors Need Different Finance?
Some lenders assess owner builder loans differently and may ask for more detail. Check lender policy. A build for rent is a separate tax question: the way interest is treated for tax can differ from an owner-occupier build.
For tax questions, speak with your accountant, as outcomes depend on your situation. If you are self-employed, our self employed loans page covers how income can be assessed. If you are building a smaller second dwelling on your property, see our granny flat loans page.
Why a Long-Term Partner Matters Before and After the Build
A construction loan is often only the first loan in a longer story. Once the build is complete, it is a good time to review your rate and structure, and your lender can confirm how your loan will change.
We stay in touch after settlement, so you can review your loan when your situation changes. The right time to speak to us is before you sign a building contract, because the contract and the loan need to work together.
Call one of our team or book an appointment at a time that works for you, and we will map out your build funding together.
Frequently Asked Questions
How does a construction loan pay the builder?
The lender releases money in stages as each part of the build is completed. Interest is charged on the amount drawn so far, although you are approved for the full loan amount.
Are repayments lower during construction?
They usually start lower because they are based on the amount drawn, then rise as more is used. Some lenders offer interest-only repayments during the build, but terms vary by lender.
What is the maximum deposit on a WA building contract?
For contracts valued from $7,500 to $500,000, the Home Building Contracts Act 1991 (WA) limits the deposit to 6.5%. A limited exception allows up to 20% where off-site cabinetry is more than half the contract value.
When should I speak to a broker about building?
Before you sign your building contract. The contract and the loan need to work together, including the payment schedule and any allowance for variations.
