What is a construction loan?

A construction loan is a type of home loan designed 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.

This helps manage cash flow during the building process and ensures that each phase is completed before more money is released. We offer construction home loans (also known as building loans) using registered builders, with flexible conditions that recognise the cashflow challenges of a major project.

Benefits of a construction loan

Stage-based funding

You receive funds in phases as construction progresses, reducing the interest you pay by only borrowing what you need when you need it.

Interest-only payments

Our construction loans have interest-only repayment options during the build period, easing your financial burden until the project is complete.

Cash flow management

If you've chosen an interest-only period, you won't have to pay off the principal during this period. This gives you better cash flow which is handy if you're renting while building.

Example scenario

A typical house construction scenario has five stages: laying the slab, roofing and tiling, the internals, lock-up and the final payment.

Paying each bill as it comes in means you won't pay interest on your building costs until the work has been done.

For example – say you've had a $250,000 loan approved and the first invoice in is for the slab – $50,000.

If you draw down the full loan, you'd be paying interest on $250,000. But a construction loan lets you draw down just the money you need – in this case, $50,000. You can do this again at the other stages of the project. Keep in mind that as you draw down more of your loan, the amount of interest you pay will start increasing and you'll need to budget for that.

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: Post approval

Provided your documentation is in order – and subject to you meeting normal lending criteria – we’ll approve your loan. At different stages of construction, you or 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), opens in new window.

Other things to keep in mind

Inspection and valuations

During construction, we’ll require an inspection and valuation of the work completed. This is for our own internal purposes and helps us to confirm if further funds can be provided. 

For registered builders: 

  • Prior to commencement of building, to estimate value of land and proposed improvements. 
  • When the first progress claim is requested. 
  • When the final progress claim is requested.

Valuations are either external or internal but we’ll let you know in advance if we require access to the property. In most cases, we don’t charge an inspection fee. For further information, please ask your home loan specialist.

Cost overruns

Cost overruns are when the building expenses exceed the planned progress payments we agreed to at the start of your loan. For instance, you might change your cladding from timber to brick. If you exceed the amount we agreed upon, talk to us immediately about next steps. If we can’t provide additional funding, you’ll need to cover the extra cost yourself.

Your contribution

You’ll be required to make some contribution from your own funds towards your construction loan. However, the amount that you need to contribute depends on a number of factors. Please contact your home loan specialist for further information.

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.

Conversion 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.

Speak to a home loan expert

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Terms and Conditions

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.