Custom home finance in Eltham: What you need to know

Custom home finance works differently to a regular home loan because the property doesn't exist yet.

The lender advances your loan amount in stages, releasing funds at specific milestones during the build rather than as a single lump sum at settlement. You only pay interest on the amount drawn down at each stage, which means your repayments start small and increase as construction progresses. The mechanics of this progressive drawdown process determine how much you'll actually spend during the build, so understanding the structure before you sign anything matters more than most people realise.

How Construction Finance Works in Practice

Construction finance involves a progressive payment schedule tied to your building contract. Your lender holds the total loan amount and releases it according to a predetermined schedule, typically five or six stages from slab down to completion. A quantity surveyor or bank valuer inspects the work at each stage before funds are released to your builder.

Consider a buyer who secures suitable land in Eltham near the Research-Warrandyte Road shops for $650,000 and plans a custom design build costing $580,000. Their total loan amount is $1,230,000. At the first progress payment after the slab is laid, the bank releases around 15% ($87,000 toward the building component). At this point, the buyer is only paying interest on $737,000 (the land plus the first draw), not the full $1,230,000. Each subsequent drawdown increases their balance and therefore their interest cost. By the final stage, they're carrying the full loan amount. This structure means their actual interest expense during construction depends heavily on how quickly the builder progresses through each stage.

Fixed Price Contracts Versus Cost Plus Arrangements

A fixed price building contract specifies the total build cost upfront. The builder agrees to deliver your home for a set figure, regardless of material price fluctuations or labour costs during construction. This protects you from budget blowouts and gives the lender certainty when approving your loan amount.

A cost plus contract adds the builder's margin on top of actual construction costs, which means the final price can vary. Most mainstream lenders won't touch cost plus arrangements because they can't assess risk without a fixed figure. If you're planning a custom design with unique architectural features or high-end finishes, expect your lender to require detailed council plans and a fixed price contract before they'll issue approval. Some lenders also require you to commence building within a set period from the disclosure date, usually six to twelve months, to ensure the approved valuation remains current.

Owner Builder Finance and Registered Builders

Owner builder finance is harder to secure and comes with higher rates or larger deposit requirements. Lenders view owner builders as higher risk because you're coordinating trades, managing timelines, and overseeing quality without the insurance protections that come with a registered builder.

In our experience, most buyers in Eltham considering owner builder projects underestimate how much additional equity they'll need. Where a standard construction loan might require 10% to 20% deposit depending on your situation, owner builder finance often requires 30% or more. You'll also need to demonstrate relevant building experience and hold the appropriate owner builder permit. If you're planning to engage a registered builder instead, the process becomes more straightforward, though you'll still need to show the lender a signed fixed price building contract and council approval before they'll finalise your loan.

Progressive Drawing Fees and Interest-Only Repayment Options

Most lenders charge a progressive drawing fee each time they release funds during construction, typically between $300 and $500 per drawdown. Over five or six stages, these fees add $1,500 to $3,000 to your build costs. Some lenders waive these fees, which is worth asking about during your construction loan application.

During the construction period, you'll typically make interest-only repayment on the drawn amount while still covering rent or your existing mortgage elsewhere. Once the build completes and you move in, the loan converts to principal and interest repayments as a standard home loan. This is sometimes called a construction to permanent loan because it transitions from one product type to another without requiring you to refinance.

Council Approval and Development Application Timing in Eltham

Nillumbik Shire Council oversees planning approvals in Eltham, and the area's vegetation overlays and bushfire management zones can extend approval timeframes. If your land sits near the Eltham Copper Butterfly habitat areas or within significant landscape overlays near the Diamond Creek corridor, expect additional planning requirements.

Your development application needs to be approved before most lenders will issue unconditional loan approval. Some lenders will give you conditional approval based on submitted plans, but they won't release any funds until you provide evidence of council approval and a building permit. If you're looking at a land and construction package through a project builder, they often handle the council approval process as part of their service, which can accelerate the timeline. For a truly custom design working with an architect, you'll need to factor in several months for the approval process before construction can even begin.

What Eltham Buyers Should Know About Land and Build Loans

Eltham's character is defined by its leafy blocks, many of which are larger than the standard suburban quarter acre. If you're purchasing land on the larger side, particularly anything over 1,000 square metres near Research or around the Eltham North precinct, some lenders will apply higher scrutiny during the land valuation process. They want to see that your chosen block suits the type of home you're planning to build.

A land and build loan combines the land purchase and construction finance into a single facility, which means one application and one settlement process. You'll settle on the land first, then the construction component activates when you're ready to start building. This structure works well if you already own suitable land or you're buying a block and building in stages, but it requires the lender to value both the land and the proposed dwelling before approval. If there's a significant gap between land purchase and construction commencement, some lenders will want to revalue the land before releasing construction funds. Understanding these requirements upfront, particularly if you're also considering whether to renovate your existing house versus building new, helps you structure the purchase and build timeline to avoid delays.

Call one of our team or book an appointment at a time that works for you to discuss how construction finance applies to your specific project and work through the numbers based on your land cost and build budget.

Frequently Asked Questions