Common Mistakes When Applying for Construction Loans

You Need a Fixed Price Building Contract Before Most Lenders Will Talk

A fixed price building contract is not optional. Most lenders will not assess a construction loan application without one. The contract locks in the build cost, sets out the progress payment schedule, and gives the lender certainty that the project has a defined scope and price. Without it, you are asking a lender to fund something with no clear end point.

Consider a civil engineer on a two-week-on, one-week-off roster who finds suitable land near Busselton and wants to build a custom design home. The builder quotes $580,000 on a cost plus contract. The engineer assumes this gives flexibility to make changes during the build. When the application reaches the lender, it is declined. Cost plus contracts shift risk to the lender because the final cost is unknown. The engineer goes back to the builder, locks in a fixed price contract at $595,000, and reapplies. The loan is approved within a week.

The contract needs council approval and a clear start date. If you cannot commence building within a set period from the disclosure date, some lenders will withdraw the offer. This matters when you are working away and relying on the builder to coordinate council plans and approvals while you are on site.

How Progressive Drawdown Works on a Build

Lenders release funds in stages as the build progresses, not as a lump sum. Each stage is tied to a milestone: slab down, frame up, lock-up, fixing, and practical completion. The builder invoices for the completed stage, the lender arranges a progress inspection, and if the work matches the claim, the funds are drawn down. You only pay interest on the amount drawn so far, not the full loan amount.

The progress payment schedule in your building contract should match the drawdown structure the lender expects. If the builder wants 40% upfront and the lender will only release 20% at slab stage, you have a gap. That gap either comes from your own cash or the deal does not proceed. In our experience, this is where applications stall. The builder and the lender are working from different schedules, and the borrower is stuck in the middle trying to make both sides agree.

Some lenders charge a progressive drawing fee each time funds are released. It might be $300 to $500 per drawdown. Over five or six drawdowns, that adds up. Other lenders include progress inspections in the loan package. Ask upfront what the drawdown fees are and how many stages the lender expects. Do not assume it is covered.

Land and Construction Packages vs Buying Land First

A land and construction package bundles the land purchase and the build into a single loan. You settle on the land, the lender holds back the construction portion, and progressive drawdowns start once the build begins. This works if you are buying a house and land package from a developer or if the land and builder are ready to go at the same time.

Buying land first and applying for construction finance later is common when you want to secure the block before you have final plans. The risk is that land values can shift between purchase and build. If the land is worth less at the time of the construction loan application, the lender reassesses your loan to value ratio based on the new valuation. You might need to bring in more deposit to make the numbers work.

In a scenario like this, a FIFO worker buys a block in Geraldton for $180,000 and plans to build 18 months later. At the time of the construction loan application, the valuer assesses the land at $165,000. The total project cost is $520,000. The lender now treats the land value as $165,000, not $180,000, which pushes the loan to value ratio higher. The borrower needs an extra $15,000 in cash or equity to meet the lender's requirements.

Interest-Only Repayments During the Build

Most construction loans allow interest-only repayment options during the build phase. You are not required to make principal repayments until the build is finished and the loan converts to a standard home loan. This keeps repayments lower while you are also covering rent or another mortgage elsewhere.

The interest rate during construction is usually variable, even if you plan to fix the rate once the build is complete. Some lenders let you lock in a fixed rate from the start, but the rate applies to the full loan amount, not just the portion drawn down. That means you are paying interest on money you have not yet received. It rarely makes sense unless rates are climbing fast and you want certainty.

Once the build reaches practical completion, the loan converts. At that point, you can choose a variable rate, split the loan between fixed and variable, or lock in a fixed term. The conversion happens automatically in most cases, but you need to confirm the rate and structure before it occurs. If you are on site when the conversion is due, make sure someone has authority to act on your behalf or that the lender can reach you by phone or email.

Owner Builder Finance Is Harder to Access

Owner builder finance is available, but fewer lenders will touch it. The lender needs to be confident you can manage the build, pay sub-contractors, coordinate plumbers and electricians, and deliver a completed home that meets the valuation. If you are working a FIFO roster, that confidence is harder to establish. You are not on site to supervise trades, handle delays, or manage variations.

Lenders that do offer owner builder construction loans typically require evidence of building experience, a detailed cost breakdown, quotes from licensed sub-contractors, and proof that you can be on site or have a project manager in place. The loan to value ratio is often lower, sometimes capped at 70% or 75%, which means you need a bigger deposit. The interest rate may also be higher to reflect the additional risk.

If you are a qualified civil engineer with project management experience, that helps. But the lender will still want to see a registered builder involved or a project manager with a building license. Going in as a pure owner builder with no building background and a FIFO roster is a tough sell.

What Happens If the Build Goes Over Budget

The lender approves a loan amount based on the contract price and the land value. If the build goes over budget, the lender is not obliged to cover the shortfall. You fund the difference from your own cash, or the build stops.

Cost overruns happen when variations are requested, when materials cost more than quoted, or when the builder underestimated the scope. A fixed price building contract protects you from most of this, but not all. If you request changes after the contract is signed, those variations sit outside the fixed price and you pay them separately. The lender will not increase the loan amount to cover variations unless you apply for a top-up and the property value supports it.

Before you sign off on any variation, check whether you have the cash to cover it or whether the lender will consider an increase. Do not assume extra funding will be available just because the build is halfway through. Lenders reassess based on the current valuation and your current financial position. If your circumstances have changed, or if the valuer does not support the higher amount, the top-up may not be approved.

How Long You Have to Start the Build

Construction loan approvals come with a time limit. You must commence building within a set period from the disclosure date, usually six to twelve months. If the build does not start within that window, the approval lapses and you need to reapply.

This can catch FIFO workers who are managing approvals from a distance. Development applications can take months. Council approval might require changes to the plans. The builder might have a six-month wait list. If those delays push the start date past the lender's deadline, the loan approval expires.

Stay on top of the builder's schedule and the council timeline. If you can see the start date slipping, talk to the lender before the approval expires. Some lenders will extend the approval if the delay is due to council or if the builder provides a firm start date. Others will not, and you start the application process again, including a new valuation, new credit check, and new income assessment. If your income or employment has changed in the meantime, the new assessment might not match the original approval.

If you are looking at a build and you know you will be working away during the approval and construction phase, factor in the time it takes to get council plans approved and the builder's current lead time. Build those into your timeline before you commit to land or sign a building contract. Missing the lender's start deadline can cost you the approval and the deposit if the land contract has settlement deadlines tied to finance.

Call one of our team or book an appointment at a time that works for you. We will walk through the contract, the drawdown schedule, and the lender options that fit your roster and your build.

Frequently Asked Questions