Avoid These 4 Mistakes in Construction Loan Approval

Construction loan approval depends on two things: whether you can afford the loan, and whether the build itself stacks up. Lenders assess both.

If you are planning to build in Frankston, it helps to know what a lender wants to see before you sign a contract. A little preparation can save weeks of back and forth. Our team at Abundance Home Loans works with clients across Frankston and the Mornington Peninsula region, and we can access construction loan options from lenders across Australia.

How Does Construction Loan Approval Work?

A lender approves a construction loan by checking your finances first, then checking the land, the builder, the building contract and the plans. Approval is usually given for the full amount, but the money is released in stages as the build moves along.

This is different from a standard home loan, where the full amount is paid out at settlement. With a construction loan, you only pay interest on the amount drawn down, so your repayments start small and grow as each stage is paid. The trade-off is that you may be paying rent or another mortgage while you wait for the build to finish, so your budget needs room for both.

Mistake 1: Signing a Building Contract Before Checking Your Borrowing Power

Signing a contract before you know your borrowing power can leave you committed to a build you cannot fund. Check what you can borrow first, then choose a design and builder to match.

Lenders look at your income, your debts, your living expenses and your deposit. Our borrowing capacity page is a useful place to start, and we can then confirm the figure with real lender policy. Fixed price contracts are common because they give the lender a clear total cost. A cost plus contract can be harder to get approved because the final price is less certain.

Mistake 2: Not Having Council Approval and Plans Ready

Lenders generally want council approved plans, or a development application close to approval, when assessing the loan. Many accept the building permit after approval but before the first progress payment, though requirements vary by lender. Check your lender's timing, because the approval's commencement clock may already be running.

A lender will usually ask for the signed building contract, the plans and specifications, and evidence that the builder is registered. Timing matters because both your building contract and your lender may require building to start within a set period after approval, so check both sets of dates. Review the dates in your contract with your builder and your solicitor.

What Does a Lender Check About Your Builder?

A lender checks that your builder is registered, insured and able to complete the job at the contract price. A builder with a solid track record and the right paperwork makes approval smoother.

If you are building as an owner builder, expect closer scrutiny. Owner builder finance is harder to arrange, and fewer lenders offer it. Speak to us before you commit so we can tell you which lenders may consider it.

Mistake 3: Misreading the Progress Payment Schedule

A progress payment schedule sets out when your builder gets paid at each stage, and your loan is released to match it. If you do not understand it, you can be caught short when a payment falls due.

Before each payment, the lender usually arranges a progress inspection to confirm the work is done. Stages commonly run from slab, to frame, to lock-up, to fixing, to completion. Some lenders charge a progressive drawing fee for each release, so ask about it up front. The cost is small per payment, but it adds up over a build with several stages.

As an example, consider a Frankston couple building a new home on land they already own. They borrow at the illustrative rate of 6.75% p.a. and the lender approves a total of $600,000. At the slab stage the lender releases $60,000, so interest is charged on $60,000 only. At 6.75% p.a., that is $4,050 a year, or about $338 a month, on interest alone. As each stage is paid, the balance grows, and so do the repayments. Because they planned for this, they kept a buffer in their budget and were never caught short. By completion, the full $600,000 is drawn and they move to normal repayments. This is an illustration only, and your own figures will depend on your lender and your loan.

Mistake 4: Forgetting the Costs Outside the Build Contract

The building contract is rarely your total cost. Lenders may expect you to cover other costs yourself, so you need to plan for them before you apply.

These can include site costs, landscaping, window coverings and variations that come up during the build. If your builder asks for extra work, those additional payments often need to come from your own savings, not the loan. A buffer protects you if costs shift. The trade-off is that a larger buffer means less money for other goals, so it is worth working out the right amount with your broker.

Land and Construction Package or Separate Purchase?

A land and construction package bundles the land and build under linked contracts, while a separate purchase means you buy land first and then build. Both can be funded, but the approval steps differ.

With a package, the lender looks at the land contract and the build contract together. If you buy the land first, you may pay interest on the full land loan before the build begins, which can raise your costs during that period. Packages can have less flexibility on design, so weigh that against the convenience.

What Happens After the Build Finishes?

Once the final payment is made, the loan usually moves to a standard home loan with principal and interest repayments. Some lenders offer interest-only repayment options during the build, and this lowers early repayments but means you are not paying down the loan.

This is also a good moment to review your rate. Our loan health check can show whether your loan still suits you.

If you are ready to build in Frankston, we would love to help. 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. You can also learn more about our Frankston mortgage broker service.

Frequently Asked Questions