Construction Loans in Melbourne 2026: How Progress-Draw Finance Works
Building a new home - or knocking down and rebuilding - is exciting, but the finance works very differently from a standard home loan. A construction loan releases money in stages as your build progresses, and you only pay interest on what's been used. Understanding how this works (and how to structure it) can save you thousands and a lot of stress. This guide explains construction lending in Melbourne in 2026, step by step.
Dahiya Mortgage & Finance is an independent brokerage based in Lyndhurst, Victoria (Australian Credit Licence #388570), helping clients across Melbourne's south-east finance new builds, house-and-land packages and knockdown-rebuilds.
What Is a Construction Loan?
A construction loan is a home loan designed for building rather than buying an existing property. Instead of handing over the full amount at settlement, the lender releases funds in stages ("progress draws") that line up with your builder's milestones. You pay interest only on the money drawn so far, which keeps repayments low in the early stages and rising as the build advances. Once the home is finished, the loan converts to a standard principal-and-interest home loan.
How Progressive Drawdowns Work
Most fixed-price residential builds are funded across five standard stages. The typical split looks like this:
1. Slab / base (~15-20%) - foundations and concrete slab poured.
2. Frame (~20%) - the timber or steel frame is up.
3. Lock-up (~20-25%) - external walls, roof, windows and doors, so the home can be locked.
4. Fit-out / fixing (~25-30%) - internal fittings, cabinetry, plaster and plumbing.
5. Completion (~10-15%) - final finishes and handover.
At each stage your builder issues an invoice, the lender arranges a valuation or inspection to confirm the work, and the funds for that stage are released directly. We coordinate with your builder and lender at every draw so payments aren't held up.
The Big Advantage: Interest-Only During the Build
Because you only pay interest on the amount drawn, your repayments start small. At the slab stage you might only be paying interest on 15-20% of the loan; by lock-up, on around 60%. This keeps costs manageable during construction - especially helpful if you're also paying rent while your home is being built. When the build finishes, repayments move to principal and interest on the full balance.
Land + Construction in One Loan
If you're buying a block and building, a single construction loan can fund both the land and the build - no need for two applications. If you already own your land (or are doing a knockdown-rebuild on your current block), the loan funds the construction against your existing equity, which often reduces the deposit you need.
What You'll Need
A fixed-price building contract from a licensed builder.
Council-approved plans and permits.
A deposit - generally around 20% of total land-plus-build cost to avoid LMI (less is possible with LMI for eligible buyers).
Standard income and ID documents for loan approval.
Pre-approval can be arranged while you're still finalising plans, so you know your budget before you commit.
Knockdown-Rebuild and Owner-Builder
Knockdown-rebuilds are increasingly popular across established south-east suburbs - keep the location you love and build new. The finance works like a standard construction loan, using the land's existing value as part of your equity. Owner-builder loans (where you manage the build yourself) are also possible but come with stricter lender requirements; we work with specialist lenders who support them.
Common Construction-Loan Mistakes to Avoid
Underestimating the contingency. Build costs can move - keep a buffer for variations.
Choosing a builder the lender won't accept. Lenders assess the builder and contract, so check before you sign.
Forgetting the interest during the build. Budget for rising interest-only repayments as draws increase.
Cost-plus contracts. Most lenders prefer fixed-price contracts; cost-plus can complicate approval.
Frequently Asked Questions
How do construction loan drawdowns work?
Funds are released in stages (slab, frame, lock-up, fit-out, completion), with a valuation at each stage, and you only pay interest on what's drawn.
Do I pay interest on the whole loan during the build?
No - only on the amount drawn so far. Repayments start small and grow as the build progresses, then convert to principal and interest at completion.
How much deposit do I need?
Around 20% of total land-plus-build cost to avoid LMI (less is possible with LMI), plus a fixed-price contract and approved plans.
Can I finance land and construction together?
Yes - one loan can cover both, or fund the build against equity in land you already own.
Ready to Finance Your Build?
Whether it's a new build, a house-and-land package or a knockdown-rebuild, we'll structure your construction finance and manage every drawdown with your builder. Book a free consultation with our Lyndhurst team - call (03) 9005 4079, or visit our construction loans page.