How do construction or owner builder loans work? - NAB
What is a construction loan?
A construction loan is a type of home loan specifically for building or renovating properties. Instead of giving you the entire loan amount upfront, the lender releases the funds in stages as the construction progresses, also known as progressive drawdown. You may also hear these payments called progress payments.
We offer construction loans using registered builders, with flexible conditions that recognise the cashflow challenges of a major project.
Interest on what you've drawn
You're only charged interest on the amount you've drawn so far, not the full loan.
Interest-only repayments while you build
Our construction home loans (also known as building loans) have interest-only repayment options during the build period. You won't pay off the principal during this time.
Easier cash flow
Lower repayments can help if you're renting while you build.
Construction loan vs standard home loan
The main difference is when you get the money. A standard home loan is paid out in full at settlement. A construction loan is paid out in stages as your builder completes work.
Construction loan vs standard home loan
The main difference is when you get the money. A standard home loan is paid out in full at settlement. A construction loan is paid out in stages as your builder completes work.
| Standard home loan | Construction loan | |
|---|---|---|
| How you get the money | Standard home loan All at once, at settlement | Construction loan In stages, as each part of the build is finished |
| Interest | Standard home loan Charged on the full loan amount | Construction loan Charged only on the amount you've drawn so far |
| Repayments | Standard home loan Principal and interest, or interest-only | Construction loan Interest-only options during the build |
| Who gets paid | Standard home loan The seller, at settlement | Construction loan Your builder, once we receive the progress claim and invoices |
| Valuation | Standard home loan Usually once, on the existing home | Construction loan Before building starts, then at your first and final progress claims |
| What we need from you | Standard home loan Your income, expenses, assets and debts | Construction loan The same as a standard home loan, plus your builder's fixed price contract, plans, permits and insurance |
| What happens next | Standard home loan Your loan continues on the repayment type you choose at settlement | Construction loan Your loan becomes principal and interest once the interest-only period ends |
| Standard home loan | Construction loan | |
|---|---|---|
| How you get the money | Standard home loan All at once, at settlement | Construction loan In stages, as each part of the build is finished |
| Interest | Standard home loan Charged on the full loan amount | Construction loan Charged only on the amount you've drawn so far |
| Repayments | Standard home loan Principal and interest, or interest-only | Construction loan Interest-only options during the build |
| Who gets paid | Standard home loan The seller, at settlement | Construction loan Your builder, once we receive the progress claim and invoices |
| Valuation | Standard home loan Usually once, on the existing home | Construction loan Before building starts, then at your first and final progress claims |
| What we need from you | Standard home loan Your income, expenses, assets and debts | Construction loan The same as a standard home loan, plus your builder's fixed price contract, plans, permits and insurance |
| What happens next | Standard home loan Your loan continues on the repayment type you choose at settlement | Construction loan Your loan becomes principal and interest once the interest-only period ends |
How does progressive drawdown work?
Each time your builder finishes a stage, you ask us to release the money for that stage. Here's an example of how it can look for a $250,000 loan.
| Stage | Amount drawn | Total drawn | Interest is charged on |
|---|---|---|---|
| 1. Laying the slab | Amount drawn $50,000 | Total drawn $50,000 | Interest is charged on $50,000 |
| 2. Roofing and tiling | Amount drawn $50,000 | Total drawn $100,000 | Interest is charged on $100,000 |
| 3. Lock-up | Amount drawn $50,000 | Total drawn $150,000 | Interest is charged on $150,000 |
| 4. The internals | Amount drawn $50,000 | Total drawn $200,000 | Interest is charged on $200,000 |
| 5. Final payment | Amount drawn $50,000 | Total drawn $250,000 | Interest is charged on $250,000 |
In this example, if you drew the full $250,000 at the start, you'd pay interest on $250,000 from day one. Drawing in stages means your interest grows as you draw more, so it's worth budgeting for.
How each payment works
- Your builder finishes a stage.
- You send us the progress claim certificate and your builder's invoices. Send them promptly so your builder is paid on time.
- We pay your builder.
- You pay interest on the total you've drawn so far.
Is a construction loan right for your project?
A construction loan suits projects where the work happens in stages, with a registered builder. Here are some common situations.
Building a new home on land you own, or have bought
You have the land and a registered builder. A construction loan pays your builder as each stage is complete.
Buying land now, building later
Start with a land loan, which covers the land only. When you've chosen a registered builder and have a fixed price contract, you can look at a construction loan for the build.
Renovating or extending
Construction loans also cover major renovations and extensions. For smaller projects, a personal loan for home renovations may be an option.
How much deposit do you need for a construction loan?
You'll need to put some of your own money towards a construction loan. There’s no single figure, because it depends on your land, your build and how much you borrow.
Land and build deposits
Buying land and building usually means two deposits: one for the land and one for the build. If you already own the land, you'll only need the building deposit. Your land may also count towards your share of the project cost.
Do you need LMI?
It's normally needed when your deposit is under 20% of the property value, unless you qualify for a government grant or scheme. When you build, that value is the land and finished home together. Your banker or broker will tell you if LMI applies.
Not sure how much to put in?
How to get a construction loan with NAB
Step 1: Select your builder
We need to know about your builder to make sure your loan process is smooth and your funds are available when needed.
From your registered builder, we’ll need:
- copy of a signed industry standard fixed price contract
- copy of plans/specifications/permits
- copies of insurance policies (required prior to first progress payment) such as Builders All Risk insurance, Domestic/Home Warranty insurance and Public Liability insurance.
Step 2: Visit your lender
Once you’ve chosen a registered builder, you’ll need to supply details about your:
- income
- monthly expenses
- any assets you have, including properties, vehicles, investments and bank accounts.
- financial liabilities like loans and credit cards (including store cards).
You may be required to provide supporting documentation to verify your details, so that we can assess your home loan application and determine if this loan is right for you.
Step 3: At different stages, your builder will require payment
Provided your documentation is in order – and subject to you meeting normal lending criteria – we’ll approve your loan. At different stages of construction, your builder will require payment. To make these funds available, you need to provide your home loan specialist with:
- A completed and signed progress claim certificate.
- Copies of all relevant builder’s claims, invoices or receipts. Invoices are required before any claim relating to them can be processed. Before approving a progress payment, we may require further information (PDF, 257KB).
What happens during the build?
Inspections and valuations
We'll inspect and value the work completed. We do this for our own internal purposes; to confirm we can release more funds. For registered builders, we'll do it:
- before building starts, to estimate the value of the land and the planned build.
- when the first progress claim is requested.
- when the final progress claim is requested.
Valuations may be external or internal. We'll let you know in advance if we need access to the property. In most cases, we don't charge an inspection fee.
Cost overruns
A cost overrun is when building costs go above the progress payments we agreed at the start of your loan. For example, you might change your cladding from timber to brick. Get in touch with us right away so we can talk through the next steps and options available to you.
What happens when the build is finished?
Final payment
Once construction is complete, we’ll request some paperwork before we release the final portion of money.
- For new homes, a copy of the occupancy certificate or interim occupancy certificate where only external items such as driveway and landscaping (not included in construction valuation) are outstanding.
- For renovations and extensions, a copy of the final inspection certificate.
- A copy of the building insurance/fire policy may also be requested.
The certificates may differ for each state or territory. For further information, please speak to your home loan specialist.
Moving to principal and interest
Once the interest-only period of your loan ends, your loan becomes principal and interest. If you finish building before then, you can change the loan over to principal and interest. You’ll need to contact us to do that.
Frequently asked questions
-
Our construction loans are for projects built by a registered builder under a fixed price contract. If you're planning to build it yourself, a home loan specialist can talk you through your options.
-
It may. Before building starts, we estimate the value of the land and the planned build together. How much it helps depends on what the land is worth and what you still owe on it.
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The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.