When to Use Construction Finance for a Renovation

If you're buying a property in Burwood that needs more than cosmetic work, a construction loan might be what you need instead of a standard home loan.

These loans release funds progressively as the work is completed, which means you only pay interest on what's been drawn down so far. That matters when you're funding a knockdown rebuild or a renovation that involves structural changes, council approval, and a registered builder working from fixed price building contracts.

How Construction Finance Differs from a Standard Home Loan

A standard home loan releases the full amount at settlement. A construction loan releases funds in stages, tied to a progress payment schedule that matches the builder's contract. You'll typically pay interest only on the amount drawn down during the construction phase, then convert to principal and interest repayments once the work is complete.

Lenders assess these applications differently because they're funding a project, not just a property. They'll want to see council plans, a fixed price building contract with a registered builder, and evidence that the project can be finished within the loan's construction period, which is usually 12 months.

Purchase Plus Renovation in Burwood's Existing Housing Stock

Burwood's older housing stock, particularly around the streets closer to Burwood Park and south of Burwood Road, includes a mix of post-war homes and older brick cottages that often need significant structural work. If you're buying one of these properties with the intention to renovate or rebuild, the purchase price and the construction cost are rolled into a single loan.

Consider someone buying a property that needs a full interior reconfiguration, new plumbing and electrical work, and council approval for structural changes. They agree on a purchase price with the seller, get a fixed price building contract for the renovation, and apply for a construction loan that covers both. The lender releases the purchase amount at settlement, then releases the renovation funds progressively as the builder completes each stage.

The builder submits an invoice at the end of each stage. The lender arranges a progress inspection, and once the work is verified, the next drawdown is released. The buyer pays interest only on what's been drawn so far, which keeps repayments lower during the construction phase. Once the final inspection is done and the work is complete, the loan converts to a standard home loan with principal and interest repayments.

What Lenders Look for in a Renovation Construction Loan Application

Lenders need to see that the project is well planned and that the builder is qualified. That means a fixed price building contract with a registered builder, not a cost plus contract where the final price can move. They'll want to see the council plans, the development application approval, and a clear breakdown of the progress payment schedule.

They'll also assess your borrowing capacity based on the total loan amount, not just the purchase price. If the property plus renovation comes to a figure that pushes your loan-to-value ratio above 80%, you'll likely need lender's mortgage insurance. If you're using the equity in another property to fund the deposit, that complicates the application slightly, but it's still workable.

When a Knockdown Rebuild Makes More Sense than Renovation

Some properties in Burwood, particularly those on larger blocks closer to the northern edge near Concord or backing onto parkland, are better suited to a knockdown rebuild than a renovation. If the existing structure has significant issues, foundational problems, or the layout doesn't suit modern living, rebuilding can be more cost-effective than trying to save what's there.

The process is similar to a renovation construction loan, but the builder's contract will cover demolition, site preparation, and a full new build. The lender will still release funds progressively, tied to stages like slab down, frame up, lockup, fixing stage, and practical completion. You'll still pay interest only on what's drawn down, and the loan converts once the build is finished and the occupancy certificate is issued.

The main difference is timing. A knockdown rebuild usually takes longer than a renovation, so you'll need to make sure the construction period in your loan allows for that. Most lenders allow 12 months, but some will extend to 18 months if the project justifies it.

Managing Interest Costs During the Construction Phase

During construction, you're paying interest only on the amount drawn down so far. That keeps repayments lower than they would be on a standard loan, but it also means your repayments increase each time a new drawdown is released. You need to plan for that.

Some lenders offer interest-only repayment options during the construction phase, which means you're not required to make principal repayments until the loan converts. That can help manage cash flow, especially if you're also paying rent elsewhere while the work is being done. Once the construction is complete, the loan converts to a construction to permanent loan, and you start making principal and interest repayments based on the full loan amount.

There's also a progressive drawing fee charged each time the lender releases funds. It's usually a few hundred dollars per drawdown, and it covers the cost of the progress inspection. Factor that into your budget when you're working out the total cost of the project.

Choosing the Right Builder and Contract Type

Lenders will only approve construction finance if you're working with a registered builder under a fixed price building contract. A cost plus contract, where the builder charges for materials and labour as the project progresses, doesn't give the lender enough certainty about the final cost. Fixed price contracts lock in the price at the start, which protects both you and the lender.

The builder's progress payment schedule needs to align with the stages the lender will fund. Most contracts break the work into five or six stages, with a percentage of the total contract price due at each stage. The lender's progressive drawdown schedule should match that, so the builder gets paid when each stage is verified and you're not left covering the gap.

If you're considering owner builder finance, where you act as the builder and manage the sub-contractors yourself, expect the application to be more involved. Lenders see owner builder projects as higher risk, so they'll want detailed project plans, quotes from plumbers, electricians, and other trades, and evidence that you have the experience to manage the build.

What Happens if the Project Runs Over Time or Budget

If the builder finishes late or the project runs over budget, the construction loan can still convert, but you'll need to manage the gap. Most lenders allow a 12-month construction period, and if the work isn't finished by then, they may charge an extension fee or adjust the interest rate.

If the project goes over budget, you'll need to cover the additional cost from your own funds or apply for a loan variation. Lenders won't automatically increase the loan amount once the contract is signed, so it's important to have a contingency built into your budget from the start. A buffer of 10% to 15% of the construction cost is usually enough to cover unexpected issues like site conditions, material price increases, or variations to the original plans.

Call one of our team or book an appointment at a time that works for you if you're buying a property in Burwood that needs structural work or a rebuild and want to understand how construction finance fits your situation.

Frequently Asked Questions