Unlock the secrets to Knockdown Rebuild Finance

A knockdown rebuild purchase requires two distinct funding stages: settlement on the existing property, then progressive construction funding as your new home takes shape.

Bentleigh's appeal for knockdown rebuild projects stems from its established tree-lined streets, proximity to Centre Road shopping and cafes, and direct train access to the city. Properties on blocks between 500 and 700 square metres attract buyers who want the location without the limitations of the existing dwelling. The finance structure differs from a standard purchase because you need both land acquisition funding and a construction facility that releases money as building milestones are reached.

What Makes a Knockdown Rebuild Loan Different from a Standard Home Loan

You settle on the property first using a standard home loan, then switch to progressive construction drawdowns once demolition and building commence. Most lenders offering construction loans will structure this as a single approval with two phases. During the land phase, you make full principal and interest repayments on the entire loan amount. Once construction begins, the loan converts to interest-only repayments on funds drawn down, with the lender releasing additional amounts as building stages are completed.

The approval process requires council plans, a fixed price building contract with a registered builder, and confirmation that you can commence building within a set period from the disclosure date, typically 12 months. Lenders also assess your capacity to service the full loan amount once construction completes, not just the land component.

Construction Draw Schedule: How Funds Are Released

Lenders release construction funding in instalments aligned with your progress payment schedule. A typical schedule includes five or six draws: base stage, frame stage, lockup stage, fixing stage, and practical completion. Each release requires a progress inspection by the lender's valuer, who confirms that work matches the invoice value submitted by your builder.

Consider a buyer who settles on a property in Bentleigh for $1,200,000, with a building contract for $650,000. The total loan amount is approved at $1,480,000 (80% of combined land and construction value of $1,850,000). At settlement, the full land purchase is funded. Once building starts, the lender holds the construction portion and releases it progressively. After the frame stage invoice of $195,000 is submitted and verified, that amount is drawn down. Interest accrues only on the $1,200,000 land loan plus the $195,000 construction draw until the next stage is reached.

Progressive Drawing Fees and Interest During Construction

Most lenders charge a progressive drawing fee for each inspection and drawdown, typically between $300 and $500 per progress payment. Over a standard six-stage build, this adds $1,800 to $3,000 to your overall costs. Some lenders cap the number of free drawdowns or waive fees for certain loan sizes, so it's worth comparing fee structures during the application stage.

During construction, you pay interest only on the amount drawn down, not the full approved loan amount. If your builder experiences delays or stages take longer than anticipated, your interest costs remain lower than they would under a full drawdown structure. Once the build reaches practical completion and you move in, the loan converts to principal and interest repayments on the total amount.

Council Approval and Building Timeline Requirements

Your development application and council approval must be finalised before most lenders will issue formal loan approval. Bentleigh falls under the Glen Eira Council jurisdiction, which typically processes standard knockdown rebuild applications within 60 days, though this extends if your design requires planning permits due to height, setbacks, or neighbourhood character overlays. Lenders want certainty that the project can proceed without planning roadblocks that might delay or prevent construction.

Once approved, your building contract needs to show a clear start date and completion timeline. Most lenders require construction to commence within 12 months of loan settlement and finish within 12 months of the first drawdown. If your builder can't meet these windows, you may need to request an extension or restructure the approval.

How Interest-Only Repayments Work During the Build

Interest-only repayment options apply during the construction phase, reducing your monthly outgoings while you may still be renting or living elsewhere. If your land loan is $1,200,000 and you've drawn $300,000 for construction, your repayments are calculated on $1,500,000, not the full approved amount of $1,480,000. As each stage completes and additional funds are released, your repayment amount increases in line with the balance.

This structure gives you flexibility to manage cash flow during the build, particularly if you're paying rent or holding your previous property. Once construction finishes and you occupy the new home, the loan reverts to principal and interest repayments based on the full amount drawn.

Fixed Price Contracts and Cost Plus Structures

Lenders strongly prefer fixed price building contracts because they provide certainty on the total loan amount required. A fixed price contract specifies the total build cost, stage-by-stage progress payments, and inclusions, which allows the lender to assess risk and structure drawdowns with confidence. Most volume builders and project home builders operate under fixed price agreements, and these are generally the smoothest path through the approval process.

Cost plus contracts, where you pay the builder's actual costs plus a margin, create uncertainty for lenders because the final build cost isn't locked in. While some lenders will consider cost plus structures for custom home finance or owner builder finance, they typically require larger deposits, more detailed cost breakdowns, and contingency buffers built into the loan amount.

Choosing the Right Lender for Your Knockdown Rebuild

Not all lenders offer construction funding, and those that do vary in their approach to progress inspections, drawdown timing, and fee structures. Major banks tend to have established construction teams and streamlined processes, but some restrict knockdown rebuild lending in certain postcodes or require higher deposits. Regional banks and specialist lenders often provide more flexibility around build timelines, custom designs, and renovations to existing structures on the land before demolition.

If you're also considering whether to refinance an existing property to fund the deposit, or if you're using this as an investment loan while retaining your current home, the right lender choice becomes even more important. A broker with access to construction loan options from banks and lenders across Australia can compare fee structures, interest rate offerings, and serviceability treatments to find a fit that aligns with your build timeline and financial position.

Call one of our team or book an appointment at a time that works for you to discuss how a knockdown rebuild loan structure would apply to your Bentleigh project.

Frequently Asked Questions