Construction & Renovation Loans: Building Your Dream
- Orca Home Loans
- Jan 25
- 4 min read
Updated: Mar 4
Turning Plans into Reality
Whether you are planning a knockdown-rebuild in Maroubra, adding a second story in Bondi, or undertaking a major renovation in the CBD, the financing process for construction is fundamentally different from buying an established home.
Turning architectural plans into a finished home requires more than just council approval. It demands a broker who understands staged payments, builder contracts, and lender conditions.
At Orca Home Loans, we guide you through the construction loan maze. We don't just get you the money, we will also act as the liaison between your builder and your bank, ensuring the cash flows smoothly so your project stays on track.
Here is how we help you build with clarity and control.
1. How Construction Loans Are Different
Unlike a standard home loan where you get a lump sum of money on settlement day, a Construction Loan is paid out in Progress Payments.
Understanding Progress Payments
The bank does not give you (or the builder) the money all at once. Instead, the loan is released in stages as the build progresses, typically following a standard schedule:
Slab / Base
Frame
Lock-up
Fixing
Practical Completion
Managing Cash Flow While You Build
During the construction phase, you are Interest Only, and you only pay interest on the money that has actually been paid out to the builder. This means that if you have a $1m loan limit but have only used $200,000 for the slab, you only pay interest on the $200,000. This helps by keeping your repayments low while you are potentially paying rent elsewhere.
2. Unlocking Equity with "As If Complete" Valuations
This is the key to funding a major renovation. When we apply for the loan, we order a valuation that assesses the property not as it is today, but "As If Complete."
Why this matters
Consider this scenario:
Current Value: $2,000,000
Construction Cost: $1,000,000
End Value: $3,500,000
In this scenario, the bank lends against the $3.5m end value, often allowing you to borrow more than you could if you just relied on the current equity. This is essential for preventing "overcapitalisation" fears and securing the full amount needed to finish the job.
3. What Banks Expect from your Builder and Contract
Banks are risk averse. They want certainty that the house will be finished on budget. To approve your loan, they will generally require a Fixed Price Building Contract.
Documents Needed for Loan Approval
Before approval, we work with you to collate the "Construction Pack" for the lender, which includes:
Council approved plans.
Fixed Price Building Contract signed by you and the builder.
Builder’s Insurance (Home Warranty Insurance).
Choosing the Right Contract Type
Be careful as many high-end builders prefer "Cost Plus" contracts (where costs are open-ended). Most banks do not like these and will often lend significantly less against them (e.g. 60% LVR instead of 80%). We can help you navigate this negotiation or find lenders who are more flexible with high-spec builds.
4. Managing the "Admin" (So You Don't Have To)
The most painful part of building is the administration. Every time the builder finishes a stage, they send an invoice. That invoice needs to be sent to the bank, checked by the valuer, and processed before work continues.
We are here to help
We take this stress off your plate.
We check the progress claim against the contract.
We forward it to the lender.
We follow up to ensure the builder gets paid on time so tools don't go down.
Don't let finance delay your foundation.
Building is complex enough without worrying about the bank. Book a Construction Loan Strategy Session with Orca Home Loans, and let’s get your project moving.
Frequently Asked Questions
1. Can I use a "Cost Plus" contract?
It is difficult. Most major banks refuse Cost Plus contracts because there is no guaranteed final price. If you must use one (common for very high-end builds), we need to use specialist lenders or private banks, and you may need a larger deposit.
2. What happens if I want to change something during the build? (Variations)
If you change your mind (e.g. upgrading the kitchen stone), this is called a "Variation." You generally have to pay for variations from your own cash pocket. Banks dislike funding variations mid-build as it requires re-valuing the project. Because of this, it may be wise to set aside a 5% to 10% contingency fund for upgrades or changes, allowing you to approve variations without disrupting the loan or construction timeline.
3. Can I be an Owner Builder?
Lending to Owner Builders is very restricted. Most banks cap the LVR at 60% (meaning you need a large deposit) because without a professional builder, the risk of the project going unfinished is higher.
4. How much deposit do I need?
Standard construction loans usually require a 20% deposit (or equity) of the total cost (Land + Construction). However, with Lenders Mortgage Insurance (LMI), some lenders allow you to start with as little as 5-10%, though this is riskier for a build.
5. Do I pay Principal & Interest during the build?
No. Almost all construction loans are structured as Interest Only during the building phase (usually 12 months). Once the home is finished (Practical Completion), the loan automatically switches to a standard Principal & Interest loan, however we can explore options as this date approaches.
6. I just want to do a small renovation (e.g., $80k for a new kitchen). Do I need a construction loan?
Probably not. For smaller, non-structural renovations, we can often just do a "Top Up" or "Cash Out" from your existing equity. The bank releases the cash directly to you, avoiding the complex progress payment process. We can help you understand options and decide on the best approach given your specific circumstances.
Things to be aware of
This article provides general information only and is intended for educational and illustrative purposes. It does not constitute credit advice, financial advice, or a recommendation to engage in any property or lending strategy.
The figures and scenarios shown are illustrative examples only and are based on assumptions that may not reflect your personal circumstances. Government grants, stamp duty concessions and eligibility criteria are subject to change and individual qualification. Real outcomes will vary and different assumptions may materially change results.
Orca Home Loans is a mortgage broking service and does not provide taxation, legal, or financial planning advice. Readers should seek independent professional advice tailored to their circumstances before making financial decisions. Credit approval is subject to lender assessment and eligibility criteria.
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