Construction Loans: The Pros and Cons of House & Land

Buying a house and land package in Templestowe means you'll need construction finance that releases funds progressively as your home gets built, not a standard home loan that settles in one lump sum.

This type of lending works differently because you're paying for something that doesn't exist yet. The bank assesses both the land value and the proposed dwelling, approves the builder and contract, then releases funds at specific stages as construction progresses. You'll typically pay interest only on what's been drawn down, which keeps repayments lower during the build, but the application process involves more documentation and the approval depends on council plans, the registered builder, and the fixed price building contract.

Why House and Land Packages Need Construction Finance

A house and land package requires construction finance because you're purchasing land and entering a building contract simultaneously, with no existing dwelling to use as security. The lender can't rely on a finished property valuation, so they assess the land value separately and approve the construction based on council-approved plans and a registered builder's fixed price contract. This structure protects both you and the lender, but it means your loan settles in stages rather than all at once.

In Templestowe, where many buyers are attracted to newer subdivisions near the eastern end of Porter Street or developments around Macedon Road, this arrangement is standard. The land component might settle within 30 to 90 days, while the building contract triggers a separate approval process with the lender reviewing the builder's credentials, the contract terms, and whether you can commence building within a set period from the disclosure date.

How Progressive Drawdowns Work During Construction

Funds release according to a progress payment schedule tied to specific construction milestones, not calendar dates. Your builder invoices the lender after completing stages like base, frame, lock-up, fixing, and practical completion. The lender arranges a progress inspection to confirm the work matches the invoice, then releases that portion of the loan amount directly to the builder. You only pay interest on what's been drawn down so far, which means your repayments start low and increase as more funds release.

Consider a buyer building in Templestowe who has the land settled and construction underway. At base stage, the lender might release 15% of the build cost. At frame stage, another 20%. By lock-up, around 35% total has been drawn. The buyer pays interest only on those progressive amounts, not the full loan, until construction completes. That structure makes the build phase more affordable, but it also means you need to hold enough cash or arrange interim accommodation since you can't live in the property until practical completion.

Fixed Price Contracts and Why They Matter to Lenders

Lenders require a fixed price building contract because it locks in the total cost and removes the risk of budget blowouts that could leave the project underfunded. A cost plus contract, where the builder charges for materials and labour as they go, won't meet most lender requirements because there's no certainty around the final loan amount needed. The fixed price contract must come from a registered builder with appropriate insurance, and it needs to align with the council-approved plans that formed part of your development application.

This requirement protects you as much as the lender. If construction costs spiral beyond the approved loan amount, you'd need to find additional funds to complete the build or risk delays. In Templestowe, where building on sloped blocks near the Yarra River corridor can involve extra site costs for retaining or drainage, knowing the locked-in price before construction starts removes a significant variable. The contract should also specify a progress payment schedule that matches what the lender will fund, so there's no mismatch between what the builder expects and what the bank will release.

Council Approval and What It Means for Your Application

Your construction loan application won't proceed to formal approval until you have council plans that satisfy the development application process. The lender needs to see that the proposed dwelling has been assessed and approved by the local council, which confirms the build complies with zoning, setbacks, height limits, and other planning requirements. In Templestowe, this process goes through Manningham City Council, and approval times can vary depending on the complexity of the design and whether any objections are lodged.

Once council approval is in place, the lender can order a valuation based on the proposed dwelling and land combined. That valuation determines how much they're willing to lend, and it's usually based on the "as if complete" value rather than just the land. If the valuation comes in lower than expected, you may need to increase your deposit or adjust the scope of the build to fit within the approved loan amount.

Interest-Only Repayments and the Transition to Principal and Interest

During construction, most lenders offer interest-only repayment options on the amount drawn down, which keeps your monthly cost lower while you're still paying rent or a mortgage elsewhere. Once the build reaches practical completion and you move in, the loan typically converts to a standard principal and interest home loan with repayments based on the full amount borrowed. Some lenders handle this conversion automatically, while others require you to refinance or restructure the loan at that point.

In our experience, buyers underestimate how much their repayments will jump once construction finishes. If you've been paying interest only on progressive drawdowns, you might be paying a few hundred dollars a month during the build. Once the loan converts and you're repaying principal and interest on the full amount, that figure could increase significantly. Planning for that shift before construction starts means you won't be caught short when the loan transitions.

The Progressive Drawing Fee and How It Adds Up

Most lenders charge a progressive drawing fee each time they release funds to the builder, typically between $150 and $400 per drawdown. With five or six progress payments over the course of a build, that can add between $750 and $2,400 to your total costs. This fee covers the lender's administration and the cost of arranging progress inspections to verify that each stage has been completed before releasing funds.

Some lenders cap the total fee or include a set number of drawdowns in the loan package, so it's worth comparing how different lenders structure these charges when you're weighing up construction loan options. The fee isn't always highlighted in initial conversations, but it's a real cost that sits alongside your deposit, stamp duty, and settlement expenses.

Choosing Suitable Land and What Lenders Look For

Not all land qualifies for construction finance. Lenders want to see that the land is suitable for the proposed build, with clear title, appropriate zoning, and no unusual encumbrances or easements that could complicate construction. In Templestowe, where some blocks back onto the Ruffey Creek trail or sit within bushfire-prone areas, the lender will assess those factors as part of the land valuation. Blocks with significant slope, poor access, or restrictive covenants can still be financed, but they may require additional documentation or a higher deposit.

The land needs to be titled and registered before the construction loan can settle. If you're buying into a new subdivision where the developer hasn't yet completed the title process, your finance approval will remain conditional until that happens. Delays in titling can push back your build timeline, so confirming the expected title date before signing contracts helps avoid frustration later.

Owner Builder Finance and Why It's Harder to Secure

If you're planning to act as an owner builder rather than engaging a registered builder, expect the finance process to be more difficult. Most mainstream lenders won't approve construction finance for owner builders because the risk profile is higher. Without a registered builder and fixed price contract, there's less certainty around project completion, and the lender has limited recourse if the build stalls or runs over budget. Some specialist lenders do offer owner builder finance, but the rates are typically higher and the deposit requirements stricter.

For buyers in Templestowe considering this path, it's worth weighing whether the potential savings justify the additional time, complexity, and finance cost. In most cases, working with a registered builder on a fixed price contract opens up access to a wider range of lenders and more competitive construction loan interest rates, which can offset the builder's margin.

What Happens If You Need to Refinance Before Completion

If interest rates shift or your circumstances change during the build, refinancing a construction loan before practical completion is complicated. The loan is structured around progressive drawdowns and a specific building contract, so moving to a new lender mid-build means unwinding that arrangement and having the new lender re-approve the builder, contract, and remaining drawdown schedule. Most buyers wait until construction completes and the loan converts to a standard home loan before considering refinancing, unless there's a compelling reason to move earlier.

That said, if your lender increases rates significantly or your financial situation improves and you want to access a better deal, it's not impossible. It just requires more coordination and may involve costs like discharge fees, new valuation fees, and re-establishing the progress payment finance structure with the new lender.

Construction finance for a house and land package involves more moving parts than a standard purchase, but it's designed to match how new homes actually get built. The progressive drawdown structure keeps your costs manageable during construction, the fixed price contract locks in your budget, and the lender's oversight through progress inspections adds a layer of protection. If you're building in Templestowe and want to understand how your specific scenario fits within these structures, call one of our team or book an appointment at a time that works for you.

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