Construction Loans: The Pros and Cons for Investors

Construction Finance Works on a Progressive Drawdown

When you're building an investment property rather than buying an existing one, your lender releases funds in stages as the build progresses. You only pay interest on what's been drawn down, not the full loan amount, which keeps your costs lower during construction. The trade-off is more paperwork, a longer settlement process, and stricter conditions around timing and builder qualifications.

Consider someone building a duplex on a subdivided block in Ellenbrook. The lender approves a total facility of $650,000, but on settlement day, only the land portion of around $180,000 is released. The builder then submits invoices at each stage — slab, frame, lock-up, fixing, and completion — and the lender inspects before releasing the next payment. Interest accrues only on the amount drawn, so in month two, you might be paying interest on $240,000 instead of the full $650,000. By the time the build is complete, you've transitioned to standard repayments on the full amount.

You'll Need Council Approval and a Registered Builder Before the Loan Settles

Lenders won't approve construction finance without a signed building contract from a registered builder and evidence that council plans have been submitted or approved. If you're planning to build as an owner builder, your options narrow significantly, and some lenders won't lend at all. The deposit requirement is usually higher than a standard investment loan, often sitting at 20% or more, and the lender will want to see that you've budgeted for cost overruns.

The construction contract needs to be a fixed price building contract in most cases. Cost plus contracts, where you pay the builder's costs plus a margin, are harder to finance because the final loan amount is uncertain. Your lender will also expect you to commence building within a set period from the disclosure date, usually six to twelve months, to ensure the valuation and approvals remain current.

Interest-Only Repayments During Construction Keep Costs Manageable

Most lenders offer interest-only repayment options during the construction phase, which means you're only covering the interest on the drawn amount each month rather than paying down principal. Once the build is complete and you've received a certificate of occupancy, the loan converts to a standard investment loan with principal and interest repayments, or you can continue on interest-only if that suits your tax position and cash flow.

In a scenario where you're building two units in Baldivis and the total draw schedule spans nine months, your monthly interest cost might start at $900 in month one and climb to around $2,600 by month nine as more funds are released. Once construction wraps up and tenants move in, your rental income starts covering those repayments, but during the build, you'll need to fund the interest from your own cash flow or offset account.

Progress Payments Follow a Set Schedule Tied to Inspections

Lenders release funds based on a progress payment schedule, which is usually broken into five or six stages. Your builder invoices the lender after completing each stage, the lender arranges a progress inspection, and if everything checks out, they release the payment directly to the builder. There's typically a progressive drawing fee charged at each stage, which can range from $200 to $400 per inspection depending on the lender.

The schedule is tied to physical milestones, not calendar dates. If your builder runs behind because of weather or material delays, your next drawdown is delayed as well. That can create cash flow pressure if you've already paid subcontractors or suppliers and are waiting for the lender to reimburse the builder. Some lenders allow a small buffer in the loan amount to cover these gaps, but it's not standard across all lenders.

Land and Construction Packages Can Be Financed as a Single Loan

If you're buying a land and construction package from a developer, particularly in growth corridors like Byford or Alkimos, you can often finance the land and the build together under one facility. The lender will typically settle the land component first, and you'll start paying interest on that portion while the development application and council approval are finalised. Once the build starts, the drawdown process begins.

This structure works well for investors targeting house and land packages in new estates, where the builder and developer have an existing relationship and the lender is familiar with the project. It's less common with custom builds on standalone blocks, where the land purchase and construction contract are separate transactions. In those cases, you might settle the land first with a standard loan, then refinance into a construction facility once your builder is locked in and council plans are approved.

Fixed Rate Options Are Limited During Construction

Most construction loans sit on a variable rate during the drawdown phase because the loan amount is changing every few weeks. Once the build is finished and the loan converts to a standard facility, you can usually lock in a fixed rate if that suits your strategy. Some lenders offer a split rate structure where the land component is fixed and the construction portion remains variable until completion, but those products are less common and often come with higher fees.

If interest rate certainty is a priority, you'll need to weigh that against the flexibility of a construction facility. Trying to lock in a rate on a loan that hasn't been fully drawn yet creates complications for the lender, which is why most construction funding stays variable until the certificate of occupancy is issued and the loan is redrawn as a standard investment loan.

Renovation Finance Works Differently to New Builds

If you're buying an existing investment property and planning a major renovation rather than building from scratch, the loan structure shifts slightly. Some lenders will still use a progress payment schedule, releasing funds as each stage of the renovation is completed, while others will release the full renovation amount upfront if the scope is under a certain threshold, usually around $100,000. The distinction matters because it affects your cash flow and how quickly you can pay subcontractors.

Renovation loans usually require a quantity surveyor's report or a detailed scope of works from a licensed builder before approval. The lender wants to see that the finished property will be worth more than the combined loan amount, so they'll often revalue the property on an 'as if complete' basis before settling the loan. If the numbers don't stack up, they'll reduce the amount they're willing to lend, even if your deposit is large enough.

Call one of our team or book an appointment at a time that works for you. We'll walk through your build timeline, match you with lenders who understand investment construction, and make sure the drawdown schedule lines up with your builder's payment terms.

Frequently Asked Questions