Construction Loans: The Pros and Cons of Investment Builds

Construction Loans Work Differently to Standard Investment Mortgages

A construction loan releases funds in stages as your investment property is built, rather than handing over the full amount at settlement. You only pay interest on what has been drawn down at each stage, which means your initial repayments are lower than they would be with a standard loan. The lender arranges inspections at key milestones, typically slab, frame, lock-up, fixing, and practical completion, before releasing the next payment to your builder.

This structure creates both opportunity and complexity for investors. You avoid paying interest on money that has not yet been spent, but you also need to coordinate council approvals, builder contracts, and draw schedules before a single brick is laid. For Brisbane-based investors looking at land and build packages in growth corridors like Ripley or North Lakes, this funding model is often the only option available.

The Main Advantage: Interest Charged Only on Drawn Amounts

During construction, you are charged interest only on the amount the lender has released to date. If your total loan amount is $500,000 but only $150,000 has been drawn down after the slab stage, your interest calculation is based on that $150,000. As each progress payment is made, your interest cost increases incrementally.

This staged approach can reduce your holding costs during the build, particularly if construction takes six to twelve months. In our experience, investors building dual occupancy properties in inner-ring Brisbane suburbs like Chermside or Stafford benefit from this structure, as it allows them to hold existing rental income from another property without the full debt servicing pressure until the build is complete. Once construction finishes, the loan typically converts to a standard principal and interest or interest-only investment loan with repayments based on the full amount.

The Main Disadvantage: Complexity and Timing Risk

Construction loans require more documentation and coordination than a standard purchase. You need council-approved plans, a fixed price building contract with a registered builder, and a detailed progress payment schedule before the lender will issue approval. Any delay in obtaining council approval or a variation to the build can push out your timeline and increase costs.

Consider an investor planning to build a duplex on a subdivided block in Wynnum. The development application takes three months longer than expected due to council requests for design changes. During that period, interest rates rise by 0.50%, and the builder increases their quote to reflect updated material costs. The investor is now facing higher borrowing costs and a reduced rental yield on completion. Construction finance does not insulate you from timing risk, it exposes you to it in a way that purchasing an established property does not.

You Need a Fixed Price Contract, Not a Cost Plus Agreement

Lenders require a fixed price building contract with a registered builder before they will approve a construction loan. This contract locks in the build cost and provides certainty around the final loan amount. A cost plus contract, where you pay the builder's costs plus a margin, is not acceptable to most lenders because it introduces uncertainty around the total project cost.

The fixed price contract must include a progress payment schedule that aligns with the lender's draw schedule. Typically, this will be five to six stages, with each payment tied to a specific milestone. If your builder operates on a different schedule or requests payments outside the agreed stages, you will need to negotiate adjustments before the lender releases funds. This is a common friction point, particularly with smaller builders who are used to more flexible payment terms on owner-occupied projects.

Progressive Drawdown Comes with Inspection Fees

Each time the lender releases a progress payment, they arrange an independent inspection to confirm the stage has been completed. The cost of this inspection, known as a Progressive Drawing Fee, is typically between $150 and $300 per drawdown. Over a five-stage build, this adds $750 to $1,500 to your total project cost.

These fees are non-negotiable and are charged by the lender to protect their security. If you are building multiple investment properties or a larger development, some lenders will reduce the per-inspection fee or cap the total cost. For a single duplex or house and land package, expect to pay the standard rate. Factor this into your project budget alongside other build costs like plumbers, electricians, and council fees.

Interest-Only Repayment Options During Construction

Most lenders offer interest-only repayment options during the construction phase, which keeps your monthly outgoings lower while the property is not generating rental income. Once the build is complete and the loan converts to a standard structure, you can choose to continue on interest-only terms or switch to principal and interest repayments.

For investors, interest-only repayments during construction are usually the preferred option. If you are holding another property or managing other debt, minimising cash flow pressure during the build allows you to maintain serviceability without dipping into reserves. Once the property is tenanted and generating income, you can reassess your repayment structure based on your overall portfolio strategy.

You Must Commence Building Within a Set Period

Construction loan approvals typically require you to commence building within six to twelve months from the Disclosure Date, which is the date your loan is formally approved. If you do not start construction within this window, the approval may lapse, and you will need to reapply.

This requirement creates pressure to finalise council approval, engage a registered builder, and have all contracts signed before your approval window closes. For investors purchasing land in new estates around Brisbane, particularly in areas like Yarrabilba or Flagstone, the timeline can be tight. Developers may impose their own build commencement deadlines, and if those do not align with your lender's requirements, you may need to renegotiate or seek an extension.

Borrowing Capacity is Assessed Differently

Lenders assess your borrowing capacity for construction finance based on the completed property value, not the land value alone. This means you need a valuation that estimates the 'as if complete' value of the finished investment property, which requires detailed plans and specifications.

If the valuer determines that the completed property will be worth less than the combined land and construction cost, the lender may reduce the approved loan amount or require a larger deposit. This is a particular risk with custom design builds in areas where comparable sales are limited. In contrast, house and land packages in established estates tend to value more predictably because the valuer can reference similar completed properties in the same development.

Owner Builder Finance is Difficult to Obtain

If you plan to act as an owner builder rather than engaging a registered builder, your finance options are significantly reduced. Most mainstream lenders will not provide construction funding to owner builders due to the increased risk of cost overruns, delays, and incomplete builds.

A small number of specialist lenders offer owner builder finance, but the interest rates are higher, the loan-to-value ratio is lower, and the approval process is more rigorous. You will typically need to demonstrate prior building experience, provide a detailed project plan, and accept a higher deposit requirement. For most investors, the cost and complexity of owner builder finance outweigh any savings from managing the build yourself.

Construction to Permanent Loan Structures Save on Refinancing Costs

A construction to permanent loan allows you to move from the construction phase to a standard home loan structure without refinancing. The lender provides a single approval that covers both the build and the ongoing mortgage, which means you avoid paying a second round of application fees, valuation costs, and legal charges.

This structure is particularly useful for investors who want certainty around their long-term interest rate and repayment terms. Some lenders allow you to lock in a fixed rate for the post-construction phase at the time of initial approval, which can protect you from rate rises during the build. The alternative is to take out a construction-only loan and then refinance to a different lender once the build is complete, which gives you flexibility but adds cost and admin.

Speak to a Mortgage Broker Before You Sign a Building Contract

Most investors approach a broker after they have already signed a contract with a builder or purchased land. This creates problems if the contract terms do not align with lender requirements or if the project cost exceeds what the investor can borrow.

Speaking to a broker before you commit allows you to confirm your borrowing capacity, understand lender requirements, and structure the contract in a way that meets approval conditions. If you are considering a land and construction package, a renovation, or a spec home build in Brisbane, your finance structure should inform your contract terms, not the other way around. Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions