Melbourne Construction Loans: How Progress Payments Work for Your New Build
Key takeaways:
- Construction loans release funds in stages so you only pay interest on what you’ve drawn down
- A fixed-price contract and council-approved plans are usually required for approval
- Most lenders will ask for a 10–20% deposit based on the combined land and build cost
Building your dream home in Melbourne can be incredibly rewarding. Whether you're putting down roots in Carnegie, planning a knockdown-rebuild in Forest Hill or building your first home in Ferntree Gully, construction loans offer a practical way to fund the process. But they’re not quite the same as a standard home loan.
Construction loans are designed to match the way building projects unfold. Instead of receiving your loan amount in one go, funds are released in stages, and you only pay interest on what’s been drawn down so far. That can help keep repayments manageable during the build, especially if you're still renting.
Here’s what you need to know about how construction loans work in Melbourne, how progress payments are structured and what documents lenders will ask for.
Phase 1: The Loan Structure (How it Works)
Progressive Drawdowns
With a construction loan, funds are released in stages based on your builder hitting certain milestones. These are known as progress payments.
In most cases, the loan is divided into five or six stages:
- Slab or Base Stage: Covers excavation, slab pouring, base brickwork and plumbing.
- Frame Stage: Pays for wall and roof framing, windows and trusses.
- Lock-Up Stage: Covers external walls, doors and windows so the house can be locked up.
- Fixing Stage: Includes internal fittings like plasterboards, cupboards, benches, plumbing and electrical systems.
- Completion Stage: Pays for final touches like painting, flooring and driveways.
- Final/Practical Completion: Sometimes separated from stage five depending on the builder’s contract.
After each stage, the builder submits an invoice. The lender may conduct an inspection before releasing the next drawdown.
Interest-Only Payments During the Build
One of the main advantages of a construction loan is that it is usually interest-only during the construction period. That means you only pay interest on the amount that has been drawn down, not the full loan amount.
For example, if your full construction loan is $600,000 but only $150,000 has been released to the builder, your repayments are calculated on the $150,000. This can significantly ease the financial pressure while you’re still renting or covering other living costs.
Switching to Principal and Interest
Once construction is complete, your loan will usually switch to a Principal and Interest (P&I) loan. At this point, your repayments will increase to reflect the full amount borrowed plus principal.
It’s a good idea to factor this into your budget early on. Your broker can help you estimate your repayments at both stages so there are no surprises.
Phase 2: Approval and Documentation (What the Lender Needs)
Fixed-Price Contract
Most Melbourne lenders require a fixed-price building contract from a licensed builder before they will approve your construction loan.
Why? Because a fixed-price contract gives the lender cost certainty. Without it, they can’t be confident that the amount you’re borrowing will cover the full cost of the build.
The contract must be signed by both you and the builder and must break down the total cost of the build, stage by stage. This is what will be used to structure your progress payments.
Supporting Documents
In addition to the fixed-price contract, lenders will also require:
- Council-approved or private certified building plans and specifications
- A detailed and itemised cost estimate or builder’s tender
- Proof of the builder’s insurances, including Home Warranty Insurance (if required under Victorian law) and Public Liability Insurance
- Evidence of your deposit, typically in the form of savings, equity or sale proceeds from another property
Construction Loan Deposit Requirements
You’ll generally need a 10–20% deposit based on the combined cost of the land and the build. This is known as the Loan-to-Value Ratio (LVR). If you already own the land, your equity in the land may count towards the deposit.
Here’s an example:
- Land cost: $400,000
- Build cost: $500,000
- Total cost: $900,000
- Required deposit (20%): $180,000
If your deposit is less than 20%, Lenders Mortgage Insurance (LMI) may apply. A broker can help you weigh up the costs and benefits of borrowing at a higher LVR and estimate the impact on your repayments.
Phase 3: Specialist Options (The Broker Advantage)
Construction loans can vary widely between lenders, especially when it comes to interest rates, progress payment procedures and eligibility for government grants. Working with a broker can help simplify the process and ensure the loan is structured in a way that works for you.
Owner-Builder Loans in Victoria
If you plan to manage the construction yourself, you’ll need an owner-builder loan. These are available, but they’re more complex and often come with stricter requirements.
Most lenders will ask for:
- A larger deposit or existing equity – often 30% or more
- Demonstrated building experience or qualifications
- A detailed project plan and timeline
Owner-builder loans are assessed case-by-case and fewer lenders offer them. A broker can help you identify which lenders may be open to your application.
Grants and Concessions
If you’re building your first home in Melbourne, you may be eligible for:
- The Victorian First Home Owner Grant (FHOG) – currently $10,000 for new builds valued up to $750,000
- Stamp duty concessions or exemptions, depending on the value of the property
These grants can help reduce your loan amount and can sometimes be used towards your deposit or construction costs.
A broker can help you assess your eligibility and ensure your application includes the right supporting documents to apply for these grants.
Choosing the Right Construction Loan
Not all construction loans are created equal. Some lenders offer lower interest rates during the interest-only period. Others provide more flexible drawdown procedures or allow you to choose your own builder.
Your broker will help you compare key features such as:
- Melbourne construction loan rates, including how they change from construction to post-completion
- Progress payment processing times and any fees
- Offset account availability once the loan switches to Principal and Interest
- Valuation policies, particularly for land that was purchased more than 12 months ago
Construction lending is more specialised than standard home lending. A broker who understands the Melbourne property market and has relationships with multiple lenders can help match you with a loan product suited to your build and budget.
Next Steps
If you're preparing to build in suburbs like Rosebud, Carnegie or Croydon, a construction loan could be your key to getting started.
With staged payments, interest-only repayments during the build and tailored lending criteria, construction loans offer a smart way to fund your project, but they do require careful planning.
At Loan Market Connect, we can walk you through the process, explain what lenders are looking for, and compare a wide range of construction loan options from our panel of lenders.
We can also help you check your eligibility for grants and advise on structuring your loan to reduce repayments during the build phase.
To get started, reach out to Loan Market Connect in Carnegie, Ferntree Gully, Croydon, Forest Hill, Rosebud or Mansfield and let’s talk about your building plans.
FAQs
How much deposit do I need for a construction loan in Melbourne?
Most lenders require a deposit of 10–20% of the total project cost (land plus construction). A higher deposit may reduce the need for Lenders Mortgage Insurance.
How are progress payments made to the builder?
After each stage of construction is completed, the builder issues an invoice. The lender may conduct an inspection before releasing funds directly to the builder.
Do I have to start repaying the full loan straight away?
No. During the build, your loan is typically interest-only, and repayments are based only on the amount drawn down. Once construction is complete, repayments switch to principal and interest.
Can I build as an owner-builder?
Yes, but it’s more complex. Most lenders will require a larger deposit, evidence of building experience, and a detailed plan. Fewer lenders offer owner-builder loans in Victoria.
Are government grants available for new builds in Victoria?
Yes. Eligible first home buyers may receive the $10,000 First Home Owner Grant and stamp duty exemptions on new builds up to certain value thresholds. A broker can help you apply.