Building a custom home in Woollahra gives you control over layout, finishes and design in one of Sydney's most sought-after suburbs.
Construction finance works differently to a standard home loan because the lender releases funds in stages as your build progresses, not as a single upfront amount. You only pay interest on what's been drawn down, which keeps early repayments lower while you wait for the home to be finished. For self-employed borrowers, the application process requires recent financials and a fixed price building contract before most lenders will assess your serviceability.
How Construction Loans Release Funds in Stages
A construction loan releases funds through a progressive drawdown tied to specific milestones in your build. The lender holds the full loan amount and releases portions after each stage is inspected and signed off by a quantity surveyor or building inspector. Typical stages include base stage, frame stage, lock-up stage, fixing stage and completion. Each drawdown is called a progress payment, and your builder invoices the lender directly once each phase is complete.
Consider a working professional purchasing suitable land in Woollahra for $2,800,000 and contracting a registered builder under a fixed price building contract for $1,400,000. The lender approves a total loan amount of $3,360,000 at 80% of the combined land and construction cost. The land purchase settles first using a portion of the approved funds. Construction begins three months later, and the first progress payment of approximately $280,000 is released once the slab is poured and inspected. At that point, the borrower is paying interest only on the land component plus that first drawdown, not the full $3,360,000. By lock-up stage, roughly 60% of the construction amount has been drawn, and interest is calculated on that cumulative figure.
Most lenders charge a Progressive Drawing Fee each time funds are released, typically between $300 and $500 per drawdown. This fee covers the cost of the progress inspection. The progressive drawdown structure protects both borrower and lender by ensuring money is only released when work is complete, but it also means your interest bill grows with each stage rather than staying fixed from day one.
What Lenders Look for When You're Self-Employed
Lenders assess self-employed applicants on two years of tax returns, business activity statements, and an accountant's letter confirming ongoing income. For construction loan applications, they also require a fixed price building contract, council approval, and proof that the land is either owned outright or being purchased as part of the transaction. Serviceability is calculated on your net profit after business expenses, not your gross turnover, so keeping clean financials and maximising declared income in the two years before you apply makes a material difference to your borrowing capacity.
Woollahra Council is known for strict planning controls given the suburb's heritage character and low-density zoning. Many builds in the area involve variations to existing homes or new homes on subdivided blocks, both of which require a development application and detailed architectural plans. Lenders will not release funds until council approval is stamped, and they'll want to see that approval allows for the type of construction outlined in your building contract. If your plans involve significant excavation or changes to street-facing facades, expect the DA process to take four to six months from submission to approval.
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Fixed Price Contracts and Cost Plus Arrangements
A fixed price building contract sets a total construction cost upfront and protects you from cost overruns unless you request variations. Most mainstream lenders will only approve construction finance against a fixed price contract with a licensed builder who holds appropriate insurance. A cost plus contract, where you pay the builder's costs plus a percentage margin, is harder to finance because the final cost is not locked in. Owner builder finance is available from specialist lenders but typically requires at least 20% equity and evidence of prior building experience or a project manager overseeing the work.
The fixed price contract must be signed before the lender will issue formal approval. It should include a detailed scope of works, a progress payment schedule, and a start date. The schedule usually splits the build into five or six stages, with each stage allocated a percentage of the total contract price. The percentages must align with what the lender is willing to release at each inspection. If the builder's proposed schedule is heavily front-loaded, the lender may push back and require a more even distribution of payments to reduce risk.
Interest Only Repayments During Construction
Construction loans are structured with interest-only repayment options during the build period, typically for 12 to 18 months. You pay interest only on the amount drawn down so far, not on the full approved loan. Once construction is complete and you've moved in, the loan converts to a standard principal and interest mortgage with a 30-year term, or you can refinance to a different product if another lender offers a lower rate at that time.
Because you're paying interest on a rising balance as each progress payment is released, your monthly repayment will increase throughout the build. In the example above, the borrower might pay interest on $2,800,000 in the first three months while waiting for construction to start, then see repayments climb by a few hundred dollars each month as drawdowns occur. At current variable rates, each additional $100,000 drawn adds roughly $400 per month in interest-only repayments. Planning for that progressive increase is important, particularly for self-employed borrowers whose income can fluctuate quarter to quarter.
Land and Construction Packages in Woollahra
A land and construction package combines the land purchase and building contract into a single approval, which simplifies the finance process and often results in a lower interest rate than securing land first and then applying separately for construction funding. The lender assesses the total project cost and your ability to service the combined debt, and they release funds in two broad phases: land settlement first, then construction drawdowns as the build progresses.
Woollahra has limited vacant land given the suburb's established nature and heritage constraints. Most builds involve purchasing an older home on a large block, demolishing it, and constructing a new custom design. This is still treated as a land and build loan by lenders, but the demolition cost must be included in the total project budget and funded within the construction portion of the loan. If you're buying an older terrace for $4,900,000 at the current median, budgeting $100,000 for demolition and asbestos removal, then building a new home for $1,800,000, the total project cost is $6,800,000 and you'll need at least 20% equity to avoid Lenders Mortgage Insurance in most cases.
Converting to a Permanent Loan After Completion
Once the build is finished and you've received your occupation certificate from Woollahra Council, the lender will revalue the property and convert your construction facility to a standard home loan. This is called a construction to permanent loan. The final valuation determines whether you have enough equity to avoid ongoing fees or to access a lower interest rate tier. If the completed home is valued higher than the total project cost, you may be able to release equity for other purposes or negotiate a better rate based on your lower loan-to-value ratio.
The conversion happens automatically in most cases, but you're not locked in. If another lender is offering a lower rate or more suitable loan features once construction is complete, you can refinance at that point without penalty, provided your original construction loan did not include a fixed rate period. Comparing your options before the conversion takes effect can save several thousand dollars per year, particularly if your financial position or the property's value has improved during the build.
Call one of our team or book an appointment at a time that works for you. We'll walk through your build plans, your income structure, and the lenders who are most responsive to self-employed applicants in the current market.
Frequently Asked Questions
How do construction loans release funds during a build?
Construction loans release funds progressively as your build reaches specific milestones such as base, frame, lock-up and completion. The lender inspects each stage before releasing the next payment, and you only pay interest on the amount drawn down so far, not the full loan.
What do lenders require from self-employed borrowers applying for construction finance?
Lenders require two years of tax returns, business activity statements, an accountant's letter, a fixed price building contract, and council approval. Serviceability is assessed on your net profit after business expenses, so clean financials in the lead-up to your application are important.
Can I use a cost plus contract to get construction finance?
Most mainstream lenders require a fixed price building contract because it locks in the total cost and reduces risk. Cost plus contracts are harder to finance and usually require a specialist lender and higher equity.
What happens to my construction loan once the build is finished?
Once you receive your occupation certificate, the lender revalues the property and converts your construction loan to a standard home loan. You can refinance to another lender at that point if a better rate or product is available.
Do I pay interest on the full loan amount during construction?
No. You only pay interest on the amount drawn down so far. As each progress payment is released, your interest bill increases, but you're not paying interest on funds still held by the lender.
