Building a new home in WA: how a construction loan works
By Nathan Ellis · Updated 2026-07-22
Building a new home involves a different kind of finance to buying an existing one, and it’s worth understanding the differences before you sign a building contract. A construction loan specialist can help you get the structure right before, not after, you’re committed to a builder.
How a construction loan is different from a standard home loan
This staged structure protects both you and the lender: the lender isn’t releasing the full loan amount against a home that doesn’t exist yet, and you’re not paying interest on money that’s still sitting with the builder rather than being spent on your build.
The core difference is how the money is released. A standard home loan pays out the full amount at settlement. A construction loan pays out in stages, roughly aligned with your builder’s contract milestones, such as base, frame, lock-up, and completion. You typically only pay interest on the amount drawn down so far, not the full approved loan, which affects your repayments during the build.
What lenders look at before approving a construction loan
- A fixed-price building contract, rather than a cost-plus arrangement, since lenders want cost certainty.
- Council-approved plans, confirming the build is authorised to proceed.
- The builder’s own standing, including licensing and, in some cases, insurance requirements.
- Your deposit and contingency buffer, since building projects can run over budget more often than a straightforward purchase.
Getting your finance ready before you sign with a builder
It’s worth having finance pre-approval sorted, or at least a clear understanding of your borrowing capacity, before you commit to a builder and a final contract price. Builders sometimes require a deposit to lock in a contract, and walking away from a signed agreement because finance didn’t come through as expected can be costly. Working with a broker early in the process, before you’ve chosen a builder, gives you a clearer budget to shop within.
Building to hold as an investment rather than to live in changes some of these numbers too; see our guide on getting investment property finance ready for how lenders assess a build you don’t plan to occupy.
What happens once the loan is approved
Once your construction loan is approved and the build begins, the lender releases funds at each stage as your builder invoices for completed work, usually after a valuer confirms progress matches what’s being claimed. That drawdown process runs alongside the build itself and involves its own paperwork and timing considerations, separate from the initial approval decision covered here.
Timelines and delays are common, plan around them
Building projects run late more often than they run on time, whether from weather, material availability, or a builder’s own scheduling. This matters for your finance because most lenders approve a construction loan with a set completion timeframe, and a build that runs significantly over can require an extension or additional paperwork. Ask your broker or lender upfront what happens if construction takes longer than expected, so it isn’t a surprise partway through the build.
Land and construction: one facility or two
| Approach | How it works | Worth considering when |
|---|---|---|
| Combined land and construction loan | One facility covers both, drawn down in stages | You’re buying land and building soon after |
| Separate land loan, then construction loan | Two applications, land settled first | There’s a gap between buying land and starting the build |
Budgeting for more than the headline contract price
The advertised contract price from a builder rarely covers everything. Site costs, driveway and landscaping, fencing, window coverings, and connections for power and water are common extras that catch first-time builders off guard. A construction loan is generally sized against the full expected cost, so it pays to get a realistic total figure, not just the headline building contract price, before finalising how much you need to borrow.
Before you commit
Understanding the drawdown structure, the deposit and contingency requirements, and how land and construction finance fit together puts you in a stronger position before you sign anything with a builder. This is general information about how construction loans commonly work, not advice on your specific build, so confirm the details with a broker and your builder before committing. Browse Perth mortgage brokers with construction lending experience, and see our scoring methodology for how listings are ranked.
FAQ
- Is a construction loan more expensive than a standard home loan?
- Rates are sometimes slightly higher, and there can be extra fees for progress inspections. The bigger practical difference is usually how the loan is structured and drawn down, rather than a large gap in the interest rate itself.
- How much deposit do I need for a construction loan?
- Requirements vary by lender, but expect a similar or sometimes higher deposit expectation than a standard purchase, partly because lenders are financing a property that doesn't exist yet and want a buffer against cost overruns.
- What happens if the build costs more than the contract price?
- You're generally responsible for the shortfall, whether through additional funds you've saved or an increase to the approved loan if the lender agrees. This is why getting a fixed-price contract and a contingency buffer sorted before you start matters.
- Do I need land finance and a construction loan separately?
- Sometimes, particularly if you're buying land first and building later. Some lenders offer a combined land and construction facility, while others treat them as two separate applications. A broker can help you work out which structure suits your build timeline.