Everything You Need to Know About Land Purchase & Construction Loans

Buying land and building a custom home in Frankston means arranging finance that covers both the land purchase and the construction phase.

Most lenders structure this as a construction to permanent loan, which starts with a single settlement for the land, then releases funds progressively as your builder completes each stage. You'll need council approval, a fixed price building contract, and a registered builder before the loan can be finalised. During construction, you only pay interest on the amount drawn down, not the full loan amount. Once the build is complete, the loan converts to a standard home loan with principal and interest repayments.

How a Land and Construction Package Works

The loan settles when you purchase the land. At that point, you draw down the portion of the loan covering the land price, plus any associated costs like stamp duty. Construction funding is held separately and released according to a progress payment schedule tied to building milestones. Your builder invoices the lender directly at each stage, and the lender arranges a progress inspection before releasing the next payment. You make interest-only repayments on whatever has been drawn, which keeps your repayments lower during the build.

Consider someone purchasing land in Frankston South for a custom design home. They settled on the land first, drawing down that portion of the loan. Their builder submitted a fixed price building contract showing five progress payments. The lender approved progressive drawdowns at slab, frame, lockup, fixing, and completion. Each time the builder reached a stage, the lender sent an inspector, then released funds directly to the builder. The buyer paid interest only on the accumulated drawdowns, which started with just the land value and grew with each stage. Once the final inspection cleared, the loan converted to principal and interest repayments and the keys were handed over.

What You Need Before Applying for Construction Finance

You need council approval for the build, a fixed price building contract from a registered builder, and detailed council plans showing the design and specifications. Lenders also want to see that the contract includes a clear progress payment schedule, typically broken into four to six stages. The builder must be licensed and insured, and the contract should specify that you'll commence building within a set period from the disclosure date, usually six to twelve months. If you're purchasing land that hasn't yet settled, some lenders will assess the application before settlement, but they won't release construction funds until the land is in your name.

The land itself matters too. It needs to be suitable land for the type of construction you're planning. Lenders assess whether the site requires excessive earthworks, has access to services like water and electricity, and whether the location supports the projected value once the build is finished. In Frankston, blocks near the waterfront or within walking distance of Frankston Station tend to value well, while land further out or on steep gradients may require additional documentation or a larger deposit.

How the Progressive Drawing Fee and Payment Schedule Work

Most lenders charge a progressive drawing fee each time they release funds during construction. This fee covers the cost of arranging the progress inspection and processing the payment to your builder. It's usually between two hundred and six hundred dollars per drawdown, and it's either deducted from the loan or invoiced separately depending on the lender. Some lenders cap the total number of progress payments, so if your builder wants seven stages instead of five, you may need to negotiate or choose a different lender.

The progress payment schedule in your building contract should align with the lender's requirements. A common structure is base stage (slab or footings), frame stage, lockup (roof and windows), fixing stage (plumbing, electrical, plastering), and final completion. Each stage is defined in the contract, and your builder invoices the lender when that stage is done. The lender sends an inspector to confirm the work matches the invoice, then releases the payment. You don't make the payments yourself, but you do need to stay across the schedule to make sure delays don't push the build past the construction period allowed in your loan approval.

Interest Rate and Repayment Options During Construction

During the construction phase, you only pay interest on the amount drawn down at any given time. If you've drawn down the land value and the first two progress payments, you're only paying interest on that portion, not the full loan amount. This keeps repayments lower while the house is being built. Once construction finishes and the loan converts to a standard home loan, you switch to principal and interest repayments unless you've arranged an ongoing interest-only period.

The construction loan interest rate is usually the same as the lender's standard variable rate for home loans, though some lenders offer a fixed rate option that locks in during construction and continues once the loan converts. If you're planning to use the property as an investment once it's built, interest-only repayment options can continue after construction, which helps with cash flow if you're renting the property out.

Cost Plus Contracts and Owner Builder Finance

Most lenders prefer a fixed price building contract because it gives them certainty about the final loan amount. A cost plus contract, where the builder charges for materials and labour with a margin on top, introduces uncertainty and makes it harder for the lender to assess risk. If you're using a cost plus arrangement, expect fewer lender options and a requirement for a larger deposit or contingency buffer.

If you're planning to manage the build yourself as an owner builder, owner builder finance is harder to arrange and usually requires at least a twenty percent deposit. Lenders see owner builders as higher risk because the project relies on your ability to coordinate trades, manage timelines, and stay within budget. You'll need to demonstrate construction experience, provide detailed costings, and in some cases arrange additional insurance. Most clients in Frankston building a custom home or project home find it more practical to use a registered builder with a fixed price contract, which opens up access to construction loan options from banks and lenders across Australia.

Timing, Approvals, and What Happens if the Build Runs Over

Construction loans include a set period for the build, usually twelve months from the first drawdown. If your builder runs over that period, you'll need to contact the lender and request an extension. Most lenders will allow this if the delay is due to weather, council approval hold-ups, or other factors outside your control, but they may charge a fee or adjust the interest rate. If the delay is significant or the builder has gone into administration, the lender may freeze further drawdowns and require you to engage a new builder or complete the project another way.

Council approval and the development application process in Frankston can add weeks or months to your timeline, especially if the site requires detailed planning overlays or if neighbours lodge objections. It's worth building this buffer into your timeline before you commit to a build start date in your contract. Your builder should give you a realistic schedule that accounts for weather, material delays, and the time it takes for plumbers, electricians, and other subcontractors to complete their stages.

Converting to a Permanent Loan and Making Additional Payments

Once your builder reaches practical completion and final inspection clears, the lender converts the construction loan to a standard home loan. At that point, you start making principal and interest repayments based on the full loan amount. If your loan allows additional payments without penalty, you can start paying down the principal faster, which reduces the total interest you'll pay over the life of the loan. Some lenders offer refinancing options at this stage if you want to move to a different product or lock in a fixed rate for part of the balance.

If you're building a custom design home with high-quality construction finishes, the final valuation at completion may come in higher than the initial land and build costs, which gives you equity immediately. That equity can be useful if you're planning to buy another property, renovate, or access funds for other purposes. A loan health check after your build is complete can help you understand your options and whether your current loan structure still suits your situation.

Building on your own land in Frankston gives you control over the design, location, and quality of your new home. The finance structure is more involved than a standard home loan, but once you understand how the progressive drawdown works and what your lender needs at each stage, the process becomes manageable. Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions