Construction Loans Explained: Building Your Dream Home in Adelaide

What Is a Construction Loan?

A construction loan is a type of home loan designed for building a new home or doing major renovations. Unlike a standard mortgage where you receive the full amount at settlement, a construction loan releases funds in stages as the build progresses.

How Construction Loans Work

Construction loans are drawn down in stages (called "progress payments") that align with key milestones in the building process:

1. Deposit/Slab stage (10-15%): When the contract is signed and the concrete slab is poured
2. Frame stage (15-20%): When the frame, roof trusses, and roof cover are completed
3. Lock-up stage (20%): External walls, windows, doors, and roof are installed
4. Fixing stage (25-30%): Internal fittings like plasterboard, kitchen, bathroom, and cabinetry
5. Completion stage (10-15%): Final touches, painting, landscaping, and handover

Interest During Construction

One of the biggest advantages of a construction loan is that you only pay interest on the amount drawn down, not the full loan amount. This means your repayments start small and gradually increase as each stage is completed.

Example: If your total construction loan is $400,000 and only $60,000 has been drawn at the slab stage, you only pay interest on $60,000.

Land and Construction: Separate or Combined?

If you're buying land and building, you have two options:

• Separate loans: One loan for the land purchase, another for construction. This gives you flexibility but means two sets of fees.
• Combined loan: A single loan that covers both land and construction. The land portion is drawn at purchase, and construction draws follow. This is usually more cost-effective.

Choosing a Builder

Your lender will want to ensure your builder is registered and reputable. Key things to check:

• Valid SA builder's licence
• Appropriate insurance (Home Building Compensation cover)
• Membership of industry bodies like HIA or MBA
• References from previous clients

Fixed Price vs Cost Plus Contracts

Fixed price contracts give you certainty — the builder agrees to complete the work for a set price. Most lenders prefer this type of contract.

Cost plus contracts charge you the actual cost of labour and materials, plus a margin. These are riskier for both borrowers and lenders, and fewer lenders will accept them.

First Home Owners Building in SA

If you're a first home buyer building a new home in South Australia, you may be eligible for:

• $15,000 First Home Owner Grant
• Stamp duty exemption on properties up to $650,000

Get Your Construction Loan Sorted

Building a home is exciting but complex. Jain Home Loans can help you compare construction loan options, understand the draw-down process, and get pre-approved before you sign a building contract. Call Nipun on 0469 618 750.