8 May 2026

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The "should we build instead?" conversation has picked up at Claremont over the last few months. Established home prices in Melbourne have softened in some pockets, vacant land remains accessible in growth corridors, and for buyers who want a brand new home built to their specifications, the maths can stack up in interesting ways.

It can also go badly wrong. Construction lending is structurally different to a standard home loan, the current environment carries real risks that didn't exist in 2021, and there are parts of the process that catch first time builders off guard every single time. Here's what's actually involved, and what to know before signing anything.

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The basic structure

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A construction loan looks like a normal home loan with one major difference: the lender doesn't hand over the full loan amount at settlement. Instead, the loan is drawn down in stages as construction progresses, with the lender releasing each tranche only after a valuer has confirmed the work to that point is complete and to standard.

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The typical stages are:

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Deposit and slab. First drawdown after the foundation is poured.

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Frame. Second drawdown once the frame is complete.

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Lockup. Third drawdown when the roof, external walls, windows and external doors are in place and the property can be locked.

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Fixing. Fourth drawdown after internal fittings (kitchen, plumbing, electrical) are installed.

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Practical completion. Final drawdown when the build is finished and the property is ready to move into.

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You pay interest only on the amount drawn down so far, not on the full approved loan. So in the early months of a build, when only the deposit and slab payment have been released, your monthly interest costs are modest. By practical completion they'll be at full loan size.

The whole structure exists for the lender's protection. They don't want to release $700,000 on day one for a property that doesn't yet exist. They want to release $50,000 to $100,000 at a time as the asset is genuinely built.

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What the current environment means

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Three things have shifted meaningfully since the construction lending boom of 2021.

Construction costs are still elevated, but stabilising. The wild cost escalation of 2022 and 2023 has eased, but build prices are still materially higher than they were five years ago. Builders are pricing more conservatively, which means fewer of the rock bottom quotes that caused so many builder collapses two and three years ago.

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Builder solvency risk remains real. The HIA and other industry bodies are continuing to flag stress in the homebuilding sector, with cost pressures and softer demand combining to put margin pressure on builders. Several mid sized Australian builders have entered administration in the past 18 months. The risk of your builder going under partway through your project isn't theoretical.

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Interest rates during the build are higher than people remember. Borrowers who locked in construction loans in 2021 were paying around 2% during the build phase. With variable rates now in the high 5s and low 6s, the carrying cost of building over 10 to 14 months is materially more expensive than it used to be. That changes the calculus on whether to build versus buy established.

 

What a construction loan actually costs

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The numbers worth knowing.

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Interest rates are roughly in line with standard variable. Most lenders price construction loans at their standard owner occupier variable rate, which means roughly 5.95% to 6.45% in the current market depending on lender and LVR. Some specialist lenders apply a small premium of 0.10% to 0.30% on construction loans. Most major banks don't.

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LVR limits are tighter. Most lenders cap construction loans at 90% to 95% LVR including the cost of the land. LMI applies above 80% just like a standard loan, and the LMI premium on a construction loan can be slightly higher than on an established property purchase.

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Fees can add up. Beyond the standard application and settlement fees, construction loans typically incur a valuation fee at each drawdown (often $200 to $400 per inspection) and sometimes a progress payment fee. Across a typical build with five drawdowns, that's an extra $1,500 to $3,000 in fees that wouldn't apply to a standard purchase.

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Interest during construction adds up. On a $700,000 build, interest costs during a 12 month build phase typically run $15,000 to $20,000 in total, depending on how quickly the drawdowns are released. This is real money that needs to be budgeted alongside the build cost.

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The contract decision: fixed price versus cost plus

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The single most important decision in a construction project, and one that determines how much risk sits with you versus the builder.

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Fixed price contracts. The builder agrees to deliver the build for a set total price, regardless of what their actual costs end up being. If timber prices rise, they wear it. If subcontractor costs blow out, they wear it. The trade off is that builders price fixed contracts with a margin for risk, so the headline number is typically 5% to 10% higher than what a cost plus arrangement might land at if everything goes smoothly.

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Lenders strongly prefer fixed price contracts. Most major banks will only lend on a fixed price contract for a residential build, and the few that allow cost plus charge more, lend less, and require additional documentation.

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Cost plus contracts. The builder bills you for the actual cost of materials and labour, plus an agreed margin (typically 15% to 25%). In a stable cost environment with a trusted builder, this can be cheaper than fixed price. In an unstable cost environment, or with a builder you don't know well, the downside risk sits entirely with you.

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In the current environment, fixed price is almost always the right choice for an owner occupier build. The marginal cost of the builder's risk margin is worth paying for predictability, particularly given the cost volatility of the past few years.

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How to protect yourself from builder failure

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The risk that catches people out hardest. A few things genuinely help.

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Use a registered builder with verified track record. Check the builder's licence is current with the relevant state authority. In Victoria, that's the Victorian Building Authority. A builder who has been operating profitably for 10 plus years through multiple cycles is a meaningfully lower risk than a builder who started up during the 2021 construction boom.

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Check for Domestic Building Insurance. In Victoria, builders are required to take out Domestic Building Insurance (DBI) for any contract over $16,000. This is the protection that pays out if the builder dies, disappears, becomes insolvent, or has their licence cancelled. Insist on seeing the certificate of insurance before signing anything. If the builder can't get DBI cover (which sometimes happens with builders the insurers consider higher risk), that's a serious red flag.

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Stagger your deposit payments. Most state laws cap the maximum deposit a builder can request, but some builders ask for more upfront than they're legally entitled to. Don't pay more than the legal maximum, regardless of what the builder asks. Five percent is standard.

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Pay through the bank, not directly to the builder. When your lender releases each drawdown, it goes straight from the bank to the builder, after verification that the work has been completed and inspected. Avoid any arrangement where you pay the builder directly outside this structure.

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Get independent inspections at each stage. Most lenders' valuers are looking at whether the work justifies the drawdown, not whether the build is high quality. A separate, paid independent building inspector at each major stage is worth the $400 to $600 cost. They'll spot issues the lender's valuer won't flag.

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What lenders actually want to see

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Construction loan approvals are more involved than standard home loan approvals. Beyond the usual income and credit assessment, lenders will want:

A signed fixed price building contract (or equivalent) from a registered builder.

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Council approved plans and permits.

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A valuation that confirms the land plus completed build is worth at least what you're borrowing against it.

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Builder insurance documentation, including DBI.

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A clear schedule of progress payments aligned to the typical construction stages.

Evidence that you have sufficient funds to cover any shortfall between the loan amount and the total project cost.

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Getting all of this together takes time. Building applications typically take 4 to 8 weeks from initial submission to formal approval, longer than a standard purchase. Building this into your timing is essential, particularly if you're buying land on a settlement timeline.

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When building actually makes sense

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A few situations where the maths and the lifestyle case both stack up.

You have specific design requirements that established stock doesn't meet (multigenerational living, accessibility needs, specific block requirements).

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You're buying in a growth corridor where established homes are limited and land is the main supply.

You want a brand new home with builder warranty, no immediate maintenance, and modern energy efficiency.

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You have the time horizon to absorb a 10 to 14 month build process, plus the temporary accommodation costs during that period.

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You're comfortable with the carrying cost (interest during construction, rent or alternative accommodation costs, fee load) on top of the build price.

If none of those apply strongly, buying established is usually the cleaner path in the current environment.

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What to do next

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If you're seriously thinking about building, the right sequence is roughly:

Get a clear read on your borrowing capacity for a construction project specifically, before you go further than land shopping or builder conversations.

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Choose your builder carefully and check the DBI position before getting too far into design.

Engage a broker familiar with construction lending early. The lender choice matters more on construction than on standard purchases, because policies on builder requirements, drawdown management and valuation practices vary widely.

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Build a realistic timeline that includes a buffer. Construction projects in 2026 are still running 1 to 3 months longer than original estimates more often than not.

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If you'd like to work through whether building or buying makes more sense for your situation, get in touch with the Claremont team. We work on construction lending regularly, including knock down rebuilds, owner builder projects and land plus build packages. We'll help you understand what's actually involved before you commit.

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