Construction loan documentation is the paperwork a lender uses to decide how much to lend and when to release it. Having your documents ready early can help avoid delays.
If you live in Parramatta and plan to build, this guide shows how the paperwork connects to your payments. It covers the contract, the schedule and the checks along the way.
What Documents Does a Construction Loan Application Need?
A construction loan application needs your usual income and identity paperwork, plus documents about the build itself. These are the building contract, the approved plans and proof of council approval.
A lender wants to know what is being built, who is building it and what it will cost. The contract and plans answer that. Some lenders may also ask for builder licence details and evidence of insurance. Each lender sets its own list, so confirm it with your lender early rather than assuming. Our construction loans page gives an overview of the process.
Your lender will also assess whether you can afford repayments. APRA requires authorised deposit-taking institutions (ADIs) to assess new borrowers at an interest rate at least 3 percentage points above the loan rate. It helps to know your borrowing capacity before you sign a building contract.
Why the Building Contract Matters So Much
The building contract is the document the lender relies on most, because it sets the price and the payment stages. If it changes after approval, the lender may need to reassess.
In NSW, the Home Building Act 1989 says work over $20,000 needs a large job contract. That contract must include a progress payment schedule. The maximum deposit is 10 per cent. Where Home Building Compensation Scheme cover is required, the builder cannot ask for a deposit or other payment until the cover is taken out and a certificate is given. Ask for that certificate before you pay anything, and give a copy to your lender.
The trade-off is that a fixed schedule gives you certainty but leaves less room to change your mind. Variations after approval can mean more paperwork and a delay while the lender updates its figures.
How a Progress Payment Schedule Controls Your Drawdowns
A progress payment schedule lists the stages of your build and the amount due at each one. Your lender releases money in instalments as each stage is finished, rather than all at once.
In NSW, payments can be fixed amounts or percentages after set stages. They can also be amounts claimed as work is done, with supporting documents. Progress payments must match the work actually carried out.
There is a cost angle too. Because you only draw what has been released, interest is charged on the amount drawn rather than the full loan limit. NSW Government guidance says a borrower financing a project home must start mortgage repayments once the first progress payment is made and they begin to draw down on the loan. Check with your lender about any special requirements for progress payments. Some lenders also charge a fee for each drawdown, so ask what yours costs.
A Worked Example of Drawdown Repayments
As an example, consider a Parramatta couple who borrow for a build under a fixed price contract. Their first drawdown is $50,000. Using an illustrative rate of 6.75% p.a., interest alone on that amount is about $3,375 a year, or roughly $281 a month.
When the next stage is finished, the builder sends an invoice and the lender releases the second payment. Say it is another $100,000. Drawn funds now total $150,000. At the same illustrative 6.75% p.a., interest alone is about $10,125 a year, or around $844 a month. The couple budget for this rise at each stage rather than being surprised by it.
The outcome is that their repayments grow in step with the build. They keep a buffer for the later stages, when drawn amounts are highest. The figures are illustrative only. Actual rates and repayment types depend on your lender, so use a calculator and talk to a broker before you commit.
What Happens at a Progress Inspection?
A progress inspection is a check, often by a valuer, that the work claimed for a stage has been done. The lender usually waits for it before releasing the next payment.
The number and type of inspections are set by each lender. Building Commission NSW gives $250 to $500 as an indicative cost of each independent progress inspection, which is a useful guide if you choose to organise your own. Paying for an inspection adds cost, but it gives you an independent view of the quality of the work before you pay.
NSW rules say progress payments must match the work completed. If a builder asks for a payment that is ahead of the work, raise it with them and your lender before paying.
Grants and Approvals That Affect Your Paperwork
If you are a first home buyer building in NSW, the grant paperwork can run alongside your loan documents. Revenue NSW states the First Home Owner Grant is $10,000. For vacant land with a building contract, the combined value of land, contract and any variations must not exceed $750,000.
Applications needed for settlement or a first drawdown or progress payment are lodged through the approved agent providing the finance. Otherwise, they are lodged within 12 months of settlement or completed construction. For contracts signed on or after 1 July 2023, you must occupy the home as your principal place of residence within 12 months for at least 12 continuous months. Our first home buyers page explains more, and our Parramatta team can talk you through how it fits your plans.
Because eligibility rules can change, check the Revenue NSW page before you apply.
Tax Points to Raise With Your Accountant
If you are building to rent out, ask your accountant how holding costs and construction interest are treated. The ATO says holding costs for vacant land are not deductible from 1 July 2019 for most holders. Interest on borrowings linked to the construction itself is treated differently. Where one loan covers both land and construction, the interest must be apportioned.
These rules depend on your circumstances, and no outcome is certain. Your accountant can confirm how they apply to you, and our investment loans page covers the lending side.
Ready to get your paperwork in order? Call one of our LendPire team or book an appointment at a time that works for you. We can compare construction loan options from lenders across Australia and help you line up your documents before you sign a building contract.
Frequently Asked Questions
What documents do I need for a construction loan?
You need your usual income and identity paperwork, plus the building contract, approved plans and council approval. Each lender sets its own list, so confirm it early.
How do progress payments work on a construction loan?
Your lender releases funds in instalments as each building stage is finished. Interest is charged on the amount drawn rather than the full loan limit.
What is the maximum deposit on a building contract in NSW?
Under the Home Building Act 1989, the maximum deposit is 10 per cent. Where Home Building Compensation Scheme cover is required, the builder cannot ask for a deposit until the certificate is given.
Can I claim construction loan interest as a tax deduction?
It depends on your circumstances, for example whether the property is for rent. Speak with your accountant before assuming any deduction applies.
