Financing a house and land package requires a construction loan with progressive drawdowns, not a standard home loan.
The difference matters because you pay interest only on the amount drawn down at each stage, and the funds release according to a progress payment schedule tied to your builder's milestones. Most buyers in McKinnon who are considering a house and land package expect to arrange finance the same way they would for an established property. That approach fails at the application stage because lenders assess construction projects differently, and the loan structure needs to accommodate both the land purchase and the staged building payments.
How Construction Loans Release Funds for House and Land Packages
Construction loans release funds in instalments as your builder completes specific stages of the build. The lender requires a progress inspection before each drawdown to confirm the work matches the stage claimed. Typical stages include base, frame, lock-up, fixing, and practical completion, though the exact schedule depends on your construction loan agreement and the builder's contract.
Consider a buyer purchasing a house and land package in McKinnon with a land price settled separately and a building contract for the home. The lender advances the land component at settlement, then releases construction funds progressively. After the base stage is complete, the builder requests the first progress payment, the lender sends an inspector, and if approved, releases that portion. You only pay interest on what has been drawn down so far, not the full loan amount.
Most lenders charge a Progressive Drawing Fee for each inspection and drawdown, usually between $300 and $500 per stage. That cost sits outside the loan amount and needs to be budgeted separately.
Fixed Price Building Contracts and Why Lenders Require Them
Lenders approve construction finance based on fixed price building contracts, not cost plus arrangements. A fixed price contract locks in the total build cost, which gives the lender certainty that the loan amount will cover the project. Without that certainty, most mainstream lenders decline the application or require a larger buffer.
In a scenario where a McKinnon buyer negotiates a cost plus contract with a custom builder, the loan application stalls because the final cost is unknown. The lender cannot confirm that the approved loan amount will be sufficient, and they will not approve progressive drawdowns without a fixed scope. The solution is to convert the arrangement to a fixed price contract before applying, or to seek specialist construction finance that accommodates cost plus structures, which typically comes with higher interest rates and stricter deposit requirements.
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What Happens If Building Does Not Commence Within the Required Period
Most construction loan approvals require you to commence building within a set period from the disclosure date, usually six to twelve months. If the build does not start within that window, the approval lapses and you need to reapply. That means a fresh credit assessment, updated income verification, and potentially a different interest rate depending on market conditions at the time.
We regularly see this with McKinnon buyers who purchase land but delay engaging a builder while they finalise house plans or wait for council approval. If council plans take longer than expected and the building start date pushes beyond the approval period, the original loan offer is no longer valid. The buyer then needs to restart the application process, which can delay settlement on the land or require bridging arrangements if the land has already settled.
To avoid this, confirm your development application timeline with your designer and the local council before you apply for finance. If delays are likely, some lenders offer extensions to the commencement period, but this needs to be negotiated before the original approval expires.
Why McKinnon Buyers Should Compare Construction Loan Interest Rates Early
Construction loan interest rates vary significantly between lenders, and the difference compounds over the life of the loan. Some lenders offer the same rate for construction as they do for established property, while others add a margin during the construction phase or limit access to discounted rates until the build is complete and the loan converts to a standard home loan.
You also need to consider whether the lender offers interest-only repayment options during construction. Most buyers prefer interest-only payments while the build progresses because the loan balance is increasing with each drawdown and paying principal as well as interest on a growing balance adds unnecessary cost. Once the build completes and the loan converts, you can switch to principal and interest repayments if that suits your situation.
Accessing construction loan options from banks and lenders across Australia means comparing not just the headline rate but also the ongoing fees, the flexibility of the drawdown schedule, and whether the lender requires you to use a registered builder from their approved panel. Some lenders restrict house and land packages to specific builders or require the builder to have certain insurance levels, which can limit your choice if you have already selected a builder outside that panel.
How the Land Component Affects Your Loan Application
Lenders assess the land component and the construction component as separate parts of the same transaction. If you already own the land, the lender treats it as equity and you only need to borrow the construction amount. If you are purchasing the land as part of the package, the lender needs to approve both the land purchase and the building loan together, which means the total loan amount is higher and your borrowing capacity needs to cover both.
In McKinnon, where suitable land for new builds is limited and often comes as part of a subdivision, buyers typically purchase land and construction together. The land value forms part of the security, but the lender will not release construction funds until the land settlement is complete. That sequencing matters because if there is a delay in land settlement, the construction start date shifts, and you risk breaching the commencement period in your construction loan approval.
Make sure the land contract and the building contract timelines align before you exchange on either. If the land settlement is scheduled for three months away but your builder cannot start for six months after that, you need to factor that nine-month gap into your finance approval timeline. A mortgage broker in McKinnon can structure the application so that the approval period covers the full timeline, or help you arrange a split approval where the land loan settles first and the construction loan activates later.
What to Expect During the Construction Loan Application Process
The construction loan application requires more documentation than a standard home loan. You need to provide the fixed price building contract, council-approved plans, proof that your builder is registered and insured, and evidence that you can service the loan during construction when interest payments may be higher than expected.
Lenders also assess the builder's credentials to confirm they can complete the project. If the builder does not meet the lender's requirements, the application may be declined even if your financial position is sound. Choosing a registered builder with a track record of completing quality construction projects improves your approval chances and reduces the likelihood of disputes during the build.
You should also expect the lender to require a buffer in the loan amount to cover cost overruns or variations. Most lenders build in a contingency of around 10% above the contract price, which protects both you and the lender if unforeseen costs arise. If you are borrowing close to your maximum capacity, that buffer requirement can reduce the amount available for the build, so factor it into your initial budget.
Call one of our team or book an appointment at a time that works for you to discuss your construction finance options and confirm the timeline for your house and land package in McKinnon.
Frequently Asked Questions
How do construction loans release funds for house and land packages?
Construction loans release funds in instalments as your builder completes specific stages such as base, frame, lock-up, and fixing. The lender conducts a progress inspection before each drawdown to confirm the work is complete, and you only pay interest on the amount drawn down so far.
Why do lenders require fixed price building contracts for construction loans?
Lenders require fixed price contracts because they need certainty that the loan amount will cover the full project cost. Cost plus contracts do not provide that certainty, so most mainstream lenders decline applications without a fixed price agreement in place.
What happens if building does not start within the construction loan approval period?
If building does not commence within the required period, usually six to twelve months from the disclosure date, the loan approval lapses. You will need to reapply with updated income verification and a fresh credit assessment, which may result in a different interest rate.
Can I use a construction loan if I already own the land?
Yes, if you already own the land, the lender treats it as equity and you only need to borrow the construction amount. The land value forms part of the security for the loan, which can reduce your overall borrowing requirement.
What additional fees apply to construction loans?
Construction loans typically include a Progressive Drawing Fee for each inspection and drawdown, usually between $300 and $500 per stage. These fees sit outside the loan amount and need to be budgeted separately from your deposit and settlement costs.
