Lenders approve construction loans on the strength of your income, your builder's contract and your plans. If those three line up, approval is far smoother. If one is shaky, the whole application stalls.
Because you are away on roster, delays can be harder to manage. Here are five mistakes that slow approval down, and how to avoid each one.
Mistake 1: Assuming Your Roster Income Counts in Full
Lenders assess your income conservatively, and not every part of a FIFO pay packet is treated the same. Allowances, bonuses and overtime are often treated with more caution than base salary.
As a guide to the rules behind this, APRA's guidance says a prudent bank would discount less stable income such as bonuses or overtime by at least 20 per cent. Banks must also test whether you could meet repayments at a rate at least 3 percentage points above the loan's rate. Your borrowing power can end up lower than you hoped.
The fix is to work out your borrowing power before you fall in love with a set of plans. Our borrowing capacity page explains how FIFO income is assessed, and our team can run the numbers for your roster and pay structure. Different lenders treat allowances differently, so the lender you choose matters.
Mistake 2: Signing a Building Contract Before Checking It With Your Lender
A lender needs to approve your building contract and plans, so signing first can leave you stuck with terms the lender will not accept. The safest order is to get pre-approval, then confirm the contract details with your broker, then sign.
You will usually need a signed fixed price contract or similar, council-approved plans, and a registered builder. Each lender has its own rules on what it accepts, and some are stricter than others on contract type and builder checks.
The trade-off is time up front, but checking first can reduce delays later. Our page on getting loan pre-approval covers how that first step works.
How Does a Construction Loan Pay Out While the Build Happens?
A construction loan is paid out in stages as the builder completes work, rather than as one lump sum. You generally pay interest only on the amount drawn so far, though the exact terms depend on the lender.
State building laws shape the payment stages. In Western Australia, for example, progress payments must be for work already done or materials already supplied. In Queensland, a builder cannot claim more than 50 per cent of the contract price until at least half of the on-site work is complete. NSW guidance says that if you are financing a project home, repayments start once the first progress payment is made and you begin drawing on the loan.
That last point matters if you are working away. Repayments begin early, so you need to have cash flow ready before the first draw, not after the slab goes down.
Ready to get started?
Book a chat with a Finance & Mortgage Broker at FIFO Home Loans today.
Mistake 3: Ignoring How Interest Builds During the Build
Because interest is charged on the drawn amount, your repayments rise at each stage. Planning for the final repayment only, and not the ones along the way, is a common budget gap.
Consider an illustrative example using a rate of 6.75% p.a. Say a FIFO worker is building with a loan of $600,000, and the builder has been paid for half of the work, so $300,000 has been drawn. Interest on that amount is $300,000 x 6.75% = $20,250 a year, or about $1,688 a month on an interest-only basis. By the final stage, the full $600,000 is drawn, and interest alone is $40,500 a year, or $3,375 a month, before any principal is paid.
The worker sets aside a buffer from their roster pay to cover those rising repayments, and talks to the broker early about interest-only options during the build. The build finishes without any missed payments. The trade-off is that interest-only repayments during the build do not reduce the loan, and the repayments will rise when the loan moves to principal and interest. The principal and interest repayment depends on the loan term and the lender's conversion terms. Some lenders count the build period as part of the term and others start a full term at completion, so ask your lender how the repayment will be calculated. The actual rate will depend on your deposit size and lender, so check your figures with a calculator or our team.
You can read more about how these loans work on our interest only loans page.
Mistake 4: Leaving Council Approval and Plans Until Late
Lenders will not release funds without approved plans, so slow council approval can hold up your whole loan. Get your plans and approvals sorted early, and keep your broker updated on the timing.
A lender will usually want to see approved plans and a full cost breakdown before it will issue unconditional approval. A mismatch between your plans and your contract can also trigger delays. Your builder is often the best person to chase this, so ask them where things are at.
If you are buying a house and land package, the package may include pre-approved plans and a builder contract, but the lender will still need to assess both. Our house and land package loans page explains how that differs from building on land you already own.
Mistake 5: Overlooking Grants and Schemes for New Builds
Building a new home can open the door to first home owner grants, and some are only available for new builds. Amounts and rules differ in each state and territory, and they change.
As an example, Revenue NSW lists the grant at $10,000, with a $750,000 cap on the combined land and contract value for a vacant land and build. In some cases, the application is lodged through the approved agent providing your finance, so tell your broker early. The Australian Government's 5% Deposit Scheme also lists house and land packages, and vacant land with a separate building contract, as supported property types. You must meet the eligibility rules, and the scheme has price caps.
If you are a first-timer, see our page for FIFO first home buyers and the 5% deposit scheme page. Check the current rules for your state before relying on any grant, as the trade-off is that missing a deadline or cap can mean missing out.
You can see our full range of construction loans for FIFO workers for more detail. Building while on roster is very doable with the right plan. Call one of our team or book an appointment at a time that works for you, and we will walk you through approval from start to finish.
Frequently Asked Questions
How is a construction loan paid out?
It is paid in stages as the builder completes work, not as a lump sum. You generally pay interest only on the amount drawn so far, though terms depend on the lender.
Do lenders count all FIFO income for a construction loan?
Not always. Bonuses and overtime are often treated with more caution than base pay, and APRA guidance says a prudent bank would discount less stable income by at least 20 per cent.
When do repayments start on a construction loan?
They generally start once you begin drawing on the loan. NSW guidance says repayments on a project home start once the first progress payment is made.
Should I sign the building contract before applying?
It is safer to get pre-approval and have your broker check the contract details first. Lenders have their own rules on contracts and builders, so signing early can cause delays.
