How to Fund Your Building Project in Eltham

Construction finance releases funds in stages as your build progresses.

Unlike a standard home loan that settles once with a single payment to the vendor, a construction loan disburses funds progressively across multiple inspections and milestones. The lender only charges interest on the amount drawn down at each stage, which means your borrowing costs remain lower during the early months of your build. For buyers in Eltham building a new home, understanding how these staged payments work determines how much working capital you'll need and when your repayments will increase.

Fixed Price Building Contracts Anchor Your Borrowing Capacity

A fixed price building contract specifies a total construction cost that cannot be increased without a variation signed by both parties. Lenders assess your borrowing capacity against this contract amount plus the land value if you already own the site, or the combined land and construction package price if you're purchasing both together. In Eltham, where house and land packages typically involve suitable land with bushfire overlay or slope considerations, council approval timeframes and site preparation costs need to be factored into your total funding requirement before the lender will issue formal approval.

Consider a buyer purchasing a sloped block in Eltham North with a fixed price contract of $520,000 for a four-bedroom custom design. The lender assesses serviceability on the total loan amount, but interest only accrues as each progress payment is released. The builder submits a progress claim after slab pour, the lender arranges an independent inspection, and once the stage is verified, funds are transferred directly to the builder. This cycle repeats at frame stage, lock-up, fixing, and practical completion, with each drawdown triggering a progressive increase in the borrower's interest cost.

Construction Draw Schedules and Progressive Payment Stages

Most construction loans follow a five or six stage draw schedule aligned to physical milestones. Typical stages include base stage (deposit and slab), frame stage, lock-up (roof and external cladding complete), fixing stage (internals and services roughed in), practical completion, and final completion after defects are rectified. Each stage requires a progress inspection by the lender's valuer or building consultant before funds are released, and most lenders charge a Progressive Drawing Fee of between $300 and $500 per inspection to cover this cost.

The time between drawdowns varies depending on builder scheduling, weather, and the availability of subcontractors. In our experience, builds in Eltham involving custom design and Shire of Nillumbik planning overlays often take longer between base and frame stage due to site access and soil stability requirements. Buyers need to maintain sufficient cash reserves to cover holding costs during these gaps, particularly if they are paying rent elsewhere or servicing a bridging loan while construction proceeds.

Interest-Only Repayment Options During Construction

Construction loans typically offer interest-only repayment options during the building period, with principal and interest repayments commencing once the loan converts to a standard home loan at practical completion. This structure keeps repayments lower while you are funding both the build and your existing accommodation costs. Interest is calculated daily on the drawn balance, so after the first drawdown of, say, $150,000 for slab and footings, you pay interest only on that amount until the next stage is funded.

Once construction reaches practical completion and the final drawdown is made, the loan converts to a construction to permanent loan with principal and interest repayments calculated over the remaining loan term. Buyers often underestimate the repayment increase at this conversion point, particularly if variable rates have moved during the construction period. Structuring your loan with a buffer and testing serviceability at a higher assessment rate provides some insulation against rate movement between approval and completion.

Owner Builder Finance and Cost Plus Contracts

Owner builder finance is available from a smaller panel of lenders and requires the borrower to hold an owner builder permit and demonstrate building experience or engage a project manager. The lender assesses the total project cost using a quantity surveyor's report rather than a fixed price building contract, and drawdowns are released against invoices from subcontractors and suppliers rather than a head contractor's progress claim.

Cost plus contracts, where the builder charges a margin over actual costs rather than a fixed price, present a similar challenge for lenders. The final build cost is not locked in at the outset, which increases the lender's risk and typically results in a higher interest rate or a requirement for additional equity. In Eltham, where custom builds on irregular lots often involve unexpected excavation or retaining costs, cost plus structures can offer flexibility, but buyers need a contingency buffer of at least 10% to 15% to avoid running out of approved funds before practical completion.

Land and Construction Packages Versus Buying Land First

A land and construction package purchased from a developer or builder combines the land contract and building contract into a single transaction, often with a requirement to commence building within a set period from the Disclosure Date. These packages simplify the approval process because the lender assesses one combined security value rather than sequencing two separate loans. However, buyers typically have less control over design variations and builder selection compared to purchasing land independently and then choosing a registered builder.

For buyers purchasing land in Eltham independently, the sequence involves settling the land purchase with a standard home loan or cash, then applying for construction finance once council plans and building permits are approved. The existing land loan is often refinanced and consolidated into the construction facility at this point, with the lender taking a first mortgage over the land and the works in progress. This structure allows greater design flexibility and builder choice, but adds a second approval process and typically results in a gap of several months between land settlement and construction commencement.

Development Application and Council Approval Timing

Shire of Nillumbik planning overlays covering much of Eltham require a planning permit for most new dwellings, which adds between eight and sixteen weeks to the pre-construction timeline depending on whether the application is standard or requires referral to external authorities. Lenders will issue conditional approval before the planning permit is granted, but formal loan documents cannot be signed and funds cannot be drawn until all planning conditions are satisfied and the building permit is issued.

Buyers often lock in a fixed construction loan interest rate at the time of conditional approval, which provides certainty during the planning and permit phase. However, most fixed rate locks expire after 90 days, and if the planning process extends beyond this window, the rate reverts to the prevailing market rate at the time of first drawdown. In a rising rate environment, this can materially affect borrowing capacity and repayment serviceability.

Renovation Finance and House Improvement Loans

Renovation finance operates on a similar drawdown principle to new construction loans, with funds released progressively as work is completed and inspected. Renovating your house in Eltham to add a second storey or extend into the rear yard involves the same progress inspection process, though the loan structure differs because the existing dwelling remains habitable and retains its full security value throughout the works.

Lenders typically advance up to 80% of the improved property value for renovation projects without requiring lenders mortgage insurance, compared to new construction where the land may represent only 30% to 40% of the total security during the early stages. This makes renovation finance more accessible for buyers with limited cash deposits, though the requirement to remain living on-site during construction can extend project timelines and increase holding costs.

Understanding the timing, cost structure, and staged funding of building project finance allows you to plan cash flow accurately and avoid underfunding your build. The distinction between construction loans and standard home loans is material, and the choice of contract type, builder, and land package structure all affect how your loan is assessed and how much working capital you need to hold in reserve.

Call one of our team or book an appointment at a time that works for you to discuss how construction funding applies to your specific building project in Eltham.

Frequently Asked Questions