Construction Loan for a First Home Buyer: How Building Your First Home Is Financed

A construction loan for a first home buyer is a home loan that is paid out in stages as your house is built, rather than as one lump sum at settlement. If you are a first home buyer building a house, the loan releases money to your builder at set points during construction, and you usually pay interest only on the amount that has been drawn so far. How it works depends on your circumstances and your lender’s criteria, so the detail below is a general guide rather than advice for your situation.

This article explains what a construction loan is, how progress payments on a construction loan work, what deposit and costs to plan for, the difference between fixed and variable rates, and how a first home buyer building a house loan compares with a standard home loan. It is written for first home buyers who are weighing up building rather than buying an existing home. If you would rather talk it through, the team at Finance Lab works with first home buyers across our first home buyer home loans service.

What a construction loan is

A construction loan is a type of home loan designed for building a new home rather than buying one that already exists. Instead of handing over the full loan amount at the start, the lender releases the funds in instalments that line up with the stages of the build. This is the main way a first home buyer construction loan differs from a standard mortgage.

During the building period, you generally make interest only repayments, which for an initial period mean your repayments only cover interest on the amount borrowed, so you are not paying off the principal and your debt is not reduced. Once the home is finished, the loan usually converts to a standard principal and interest loan, where you make regular repayments on the amount borrowed plus you pay interest on that amount.

Because the loan is tied to a build, the lender will want to see your fixed-price building contract, council approvals and plans before money is released. The exact requirements depend on your circumstances and your lender’s criteria.

How progress payments on a construction loan work

Progress payments are the heart of how construction lending works. Rather than one payment, the loan is drawn down across a series of stages as the builder completes each part of the home.

A typical build is broken into recognised stages, and the lender pays the builder after each one is finished and, in most cases, inspected. The stages commonly run in this order.

Because you pay interest only on the funds drawn so far, your repayments start small and grow as more of the loan is released. This is why a first home buyer building a house loan can feel cheaper in the early months than a standard loan of the same size, though the total you owe still builds towards the full contract amount.

Deposit and how much you can borrow

Your deposit shapes the loan and the cost just as it does for any home loan. A great savings goal for a house deposit is 20 per cent of the purchase price, plus enough to cover buying costs, and a 20 per cent deposit will avoid you needing to pay lenders mortgage insurance.

If you have a smaller deposit, you may still be able to proceed. You may be able to buy a home with a much smaller deposit through the Australian Government 5 per cent Deposit Scheme, and similar schemes can apply to building or buying a new home. Eligibility for any scheme depends on your circumstances and the rules of the scheme, so it is worth checking before you commit. Buying with 5 percent deposit To understand how your deposit affects the size of your loan, it helps to know your loan to value ratio first. What is lvr first home buyer

Lenders mortgage insurance is a one-off cost that can apply when your deposit is below 20 per cent, and it protects the lender, not you. Whether it applies, and how much it costs, depends on your deposit and your lender. You can get a rough idea before you talk to anyone. Try the lenders mortgage insurance calculator to see an estimate first.

Fixed or variable rate while you build

The interest rate on your construction loan works the same way as any home loan, and you usually choose between a fixed and a variable rate.

A fixed interest rate stays the same for a set period, for example five years, after which the rate goes to a variable interest rate or you can negotiate another fixed rate. A variable interest rate can go up or down as the lending market changes, for example when official cash rates change. As a reference point, the Reserve Bank of Australia cash rate target was 4.35 per cent, effective 6 May 2026, and it influences the rates lenders charge. Your actual rate depends on your lender, your loan and your circumstances, not on the cash rate alone.

When you compare construction loans, look at the comparison rate, which is a single figure for the cost of a loan that includes the interest rate and most fees, so it gives a fairer picture than the headline rate alone. An offset account, redraw and line of credit are ways of putting extra money into your loan to reduce the amount of interest you pay, and some construction loans offer these features once the build is complete.

Construction loan versus a standard home loan

It helps to see the two side by side, because the differences change how you budget during the build.

Costs to plan for beyond the build

Building your first home brings the same upfront costs as buying, plus a few that are specific to construction. Planning for these early helps you avoid surprises.

Stamp duty is a one-off state government property-transfer tax, and you typically need to pay this within 30 days of settlement. When you build, duty is often charged on the land value rather than the finished home, and first home buyers may be eligible for concessions, which depend on your state and your circumstances. Stamp duty sa

Inspections matter when you build. A building inspection looks for structural issues, damp, electrical safety, and the cost of maintenance or repairs, while a pest inspection looks for things like termite activity or other pest issues. Many lenders also arrange their own valuations at stages of the build before releasing each progress payment.

Other costs include conveyancing or solicitor fees, lender establishment fees, and home and contents insurance, plus builder’s insurance during construction. To see how repayments might look once the loan converts to principal and interest, you can model a few scenarios first. First home loan repayments

Frequently asked questions

Talk to the team at Finance Lab

If you are a first home buyer thinking about building rather than buying, the team at Finance Lab can walk you through how a construction loan works, what your progress payments might look like, and the lenders and schemes that may suit your situation.