Construction loan interest rates work differently to standard home loans because you only pay interest on funds as they're drawn down during each stage of the build.
If you're planning to build in Marrickville, whether that's a custom design on a block you already own or a house and land package near Enmore Park, understanding how construction finance is priced will help you budget accurately through settlement, slab pour, frame stage, and every payment in between. The rate itself is one part of the equation. The other is knowing when and how often you'll be charged, because unlike a traditional mortgage where you borrow the full amount upfront, construction funding releases in instalments as your registered builder reaches milestones.
How Construction Loan Interest Rates Are Structured
Construction loan interest rates are typically variable and often slightly higher than standard home loan rates. Most lenders only charge interest on the amount drawn down at each stage, so if your loan amount is approved but only 20% has been released to cover the slab, you're only paying interest on that portion. This structure keeps your repayments lower during the build, though you'll need to account for the full loan servicing once construction is complete and the loan converts to a standard mortgage.
Consider a scenario where someone is building a dual-occupancy development on a block near the Cooks River. They've been approved for a land and construction package, with the land component settled and construction funding staged across five progress payments. In the first few months, while only the deposit and initial slab payment have been drawn, their repayments might be a few hundred dollars. By lock-up stage, when around 70% of the loan has been released, repayments increase accordingly. The ability to service the full loan amount is still assessed upfront during the construction loan application, but the actual cash outlay during the build reflects what's been spent so far.
What You Pay Beyond the Interest Rate
Beyond the interest rate itself, construction finance typically includes a Progressive Drawing Fee or similar administration charge each time funds are released. These fees vary by lender but generally range from a few hundred dollars per drawdown. Some lenders charge a flat fee per progress payment, others calculate it as a percentage of the amount released, and a few waive it entirely if you're also settling the land through them.
You'll also need a progress inspection before each payment is released. The lender arranges a valuer to confirm the build has reached the stage your builder is claiming before releasing the next instalment. That inspection fee is usually deducted from the drawdown or charged separately, and it happens at every stage, so it's worth factoring into your overall construction funding costs.
In our experience, buyers in Marrickville who are renovating or adding a second dwelling often underestimate these smaller costs because they're focused on the build contract and council approval. The fees themselves aren't large individually, but five or six drawdowns can add a few thousand dollars to the total, and if your timeline stretches out due to weather or material delays, you're paying interest for longer than anticipated.
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Fixed Price Contracts and How They Affect Your Drawdown Schedule
Most lenders prefer fixed price building contracts because the total cost is agreed upfront, which makes the loan amount easier to assess and reduces the risk of cost overruns. A fixed price contract also locks in your progress payment schedule, so you and the lender both know when funds will be needed and in what amounts.
If you're working with a cost plus contract, where the final price adjusts based on actual expenses, fewer lenders will offer construction finance, and those that do may apply a higher interest rate or require a larger deposit. The uncertainty around the final loan amount creates additional risk, and lenders price that in. For most buyers building a new home in Marrickville, a fixed price building contract with a registered builder is the clearest path to securing construction finance at a reasonable rate.
Interest-Only Repayment Options During the Build
During construction, most borrowers are on interest-only repayment options, meaning you're only covering the interest charges on the drawn amount without reducing the principal. Once the build is complete and the construction to permanent loan converts to a standard mortgage, you'll typically switch to principal and interest repayments unless you've arranged otherwise.
This structure is designed to keep costs manageable while you're potentially covering rent or another mortgage elsewhere, but it does mean your loan balance doesn't reduce during the build. Some lenders allow additional payments during construction if you want to chip away at the principal early, though most buyers prefer to keep cash on hand for unexpected costs or settlement adjustments.
What Affects the Rate You're Offered
Your construction loan interest rate depends on the same factors as any home loan: deposit size, borrowing capacity, employment type, and credit history. Lenders also consider the build itself. A project home loan with a volume builder on a straightforward block will generally attract a more favourable rate than owner builder finance or a complex custom design that requires extensive council plans and a longer construction timeline.
Location matters too, though not in the way you might expect. Marrickville itself is well-regarded by lenders due to steady demand and established infrastructure, but if your block has access issues, contamination concerns, or requires a lengthy development application, that can affect both your rate and the range of lenders willing to offer construction funding.
If you're also looking at refinancing an existing property to fund the build, or using equity from an investment loan to cover your deposit, your broker can structure the application to present the lowest risk profile to the lender. Sometimes that means splitting the land and construction components across different loan products, other times it's about timing the application to align with council approval.
When Construction Finance Converts to a Standard Loan
Once your build is complete and you've received a final inspection and occupancy certificate, the construction loan converts to a standard home loan. At that point, the full loan amount is drawn, and you'll move to regular principal and interest repayments unless you've arranged to stay on interest-only.
Some lenders automatically convert the loan at the rate you were on during construction. Others allow you to refix or switch products at completion, which can be useful if rates have moved or your circumstances have changed. It's worth confirming this process during your construction loan application so you're not caught off guard when the build wraps up and repayments increase.
If you're planning to refinance once the property is complete, either to access equity or to secure a lower rate elsewhere, you'll want to time that carefully. Most construction loans require you to commence building within a set period from the Disclosure Date, and if the build drags on or you delay the conversion, some lenders apply higher rates or fees during the extension.
Timing, Approvals, and Rate Locks
Construction finance is typically approved with a rate that applies once funds start being drawn. Unlike a standard home loan where you might lock in a rate for settlement in 90 days, construction loans are approved subject to council approval, a signed fixed price building contract, and sometimes soil tests or other pre-construction conditions.
If rates rise between your approval and your first drawdown, you'll generally pay the higher rate unless you've specifically locked it in. Not all lenders offer rate locks on construction loans, and those that do may charge a fee or limit the lock period to a few months. Given that council approval and builder availability in Marrickville can push timelines out, it's worth asking your broker whether a rate lock is available and whether it makes sense for your build schedule.
When you're ready to talk through construction finance for your Marrickville build, or if you'd like to compare construction loan options from banks and lenders across Australia, call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
How are construction loan interest rates different from standard home loan rates?
Construction loan interest rates are typically variable and slightly higher than standard home loan rates. You only pay interest on the amount drawn down at each stage of the build, rather than the full loan amount upfront. Once construction is complete, the loan converts to a standard mortgage with full principal and interest repayments.
What fees are charged during a construction loan besides interest?
Most lenders charge a Progressive Drawing Fee each time funds are released, which can range from a few hundred dollars per drawdown. You'll also pay for progress inspections before each payment is released, and these costs can add a few thousand dollars over the course of a typical five or six stage build.
Do I need a fixed price building contract to get construction finance?
Most lenders prefer fixed price building contracts because the total cost is agreed upfront, making the loan amount easier to assess. Cost plus contracts, where the price adjusts based on actual expenses, are accepted by fewer lenders and may attract a higher interest rate or require a larger deposit.
When does a construction loan convert to a standard home loan?
The construction loan converts to a standard home loan once your build is complete and you've received a final inspection and occupancy certificate. At that point, the full loan amount is drawn and you move to regular principal and interest repayments unless you've arranged to stay on interest-only.
Can I lock in a construction loan interest rate before the build starts?
Not all lenders offer rate locks on construction loans, and those that do may charge a fee or limit the lock period to a few months. If rates rise between your approval and your first drawdown, you'll generally pay the higher rate unless you've specifically locked it in.
