A home loan for land and construction is a specialized type of financing that helps individuals and businesses fund both the purchase of land and the building of a property. Unlike a traditional home loan, which is typically paid as a lump sum upon the settlement of a property, a land and construction home loan is disbursed in stages as construction progresses. These payments are based on the completion of specific construction phases, and the funds are usually paid directly to the builder. When applying for this type of loan, borrowers are generally required to provide a deposit and submit detailed plans that outline the scope of the project. The loan is secured by the property being built, meaning the lender retains rights to the property until the loan is fully repaid.

The main difference between a home loan for land and construction and a standard home loan is how the funds are disbursed. With a typical home loan, you receive a single, upfront payment at the settlement of the property. In contrast, a land and construction home loan is paid in instalments as various stages of the construction are completed. These instalments, known as progressive drawdowns, are paid directly to the builder, ensuring the funds are used for their intended purpose.

Another key distinction is the repayment structure. Many land and construction home loans offer interest-only repayments during the construction phase, meaning you only pay interest on the amount that has been drawn down at that time. Once the construction is finished, the loan usually transitions to a principal and interest repayment structure.

When purchasing a house and land package, you typically need two separate types of financing. First, there is the mortgage for the land purchase, which works like a regular loan. Then, you’ll need a home loan for land and construction to fund the building of the home. While these loans are processed separately, many lenders provide the option to bundle them together, simplifying the process.

Before construction begins, the builder prepares a document outlining the total cost of the project and breaking it down into various stages. Common stages include laying the foundation (slab), constructing the frame, completing the lockup stage (including windows and doors), installing the fit-out (such as plumbing and electricity), and finalizing the property. At the end of each stage, the builder issues an invoice, and the lender may send an inspector to ensure the work is progressing as planned before releasing funds from the home loan for land and construction.

The deposit required for a land and construction home loan typically ranges from 10% to 20%, depending on the lender. If you’re unable to meet the 20% deposit, you may still be able to secure the loan, but this often requires paying for Lenders Mortgage Insurance (LMI), which protects the lender if you default on the loan. An expert mortgage broker can assist you in navigating these options to find the most suitable solution.