Building your dream home is one of the most exciting milestones in life. From picking the perfect block of land to selecting the right floorplan, there’s plenty to think about. But before you lay the first brick, there’s one crucial question to answer: how much can I borrow to build my home?
Unlike standard home loans, construction loans are assessed a little differently, and understanding how lenders evaluate your application can help you move forward with clarity and confidence.
In this blog, we’ll walk you through what lenders consider when it comes to construction loans and how you can position yourself for the best outcome.
What Do Lenders Consider for Construction Loans?
Just like with any home loan, lenders will take a deep dive into your financial situation. Here’s what they’re looking for, explained in simple terms:
1. Your Income
Lenders assess how much money you earn regularly to determine whether you can afford the repayments. This includes income from:
- Full-time, part-time, or casual employment
- Self-employment
- Other sources such as rental income or Centrelink (in some cases)
The more stable and consistent your income, the stronger your position when applying for a home loan.
2. Your Expenses and Debts
They’ll look at your everyday living expenses (e.g. groceries, utilities, transport) and any existing debts, such as:
- Credit cards
- Car loans
- HECS/HELP debt
- Personal loans
This helps determine how much “spare” income you have left each month to repay a loan.
To get a clear picture of your spending, try using our Budget Planner Calculator. It can help you break down your expenses and see where your money goes—making it easier to plan for your home loan.
3. Your Credit Score and History
Your credit report gives lenders an idea of how reliable you’ve been with previous debts. A healthy credit score shows that you’ve managed repayments well and increases your chances of loan approval.
You can check your credit score for free through online providers like Equifax, Experian, or illion. It’s a good idea to review your report regularly to ensure all the information is accurate and up to date.
If you’re looking to boost your credit score, here are a few simple steps:
- Pay bills and loan repayments on time
- Avoid maxing out your credit cards
- Limit how often you apply for new credit
- Keep older credit accounts open to show a longer credit history
- Report and fix any errors you find on your credit file
Good credit habits over time can make a big difference when it comes to home loan eligibility and interest rates.
4. Your Deposit or Equity
The more you’ve saved, the better. A strong deposit, typically 20% of the total land and build cost, shows lenders you’re financially prepared and lowers your risk profile. It can also help you avoid Lenders Mortgage Insurance (LMI), which is usually required for deposits under 20%.
If you already own the land or have equity in another property, this can also work in your favour by reducing how much you need to borrow and strengthening your overall application. It’s worth speaking with one of our brokers to understand how your deposit or equity position could impact your loan options.
5. Land and Build Costs
Lenders want to know the full cost of your build, including the land and construction. They’ll also assess:
- Whether you already own the land or are buying it as part of a house and land package
- Whether your builder is reputable and licensed
- Whether you have a fixed-price contract in place (lenders prefer fixed contracts to avoid cost blowouts)
Having clear documentation and a realistic understanding of your build costs helps speed up the approval process and reduces the likelihood of surprises down the track.
What is LVR and When Does LMI Come Into Play?
You may hear the term LVR (Loan-to-Value Ratio). This is the percentage of the total property value you’re borrowing. For example, if you’re borrowing $400,000 for a home worth $500,000, your LVR is 80%.
Lenders generally prefer an LVR of 80% or lower. If your LVR is higher, you’ll likely need to pay Lenders Mortgage Insurance (LMI). LMI protects the lender (not you) in case you can’t repay the loan. While it can allow you to purchase a home with a smaller deposit, it does add to your upfront costs, so it’s important to factor it into your budget and loan planning.
How Construction Loans Work: Progress Payments Explained
Construction loans don’t work like standard home loans. Instead of receiving the full loan upfront, your funds are released in stages as the build progresses. These stages typically include:
- Slab
- Frame
- Lock-up
- Fixing
- Completion
At each stage, the builder submits an invoice, which is paid by your lender using part of your approved loan.
Here’s the key benefit: you only pay interest on the amount that’s been drawn down. For example, if only $100,000 of your $400,000 loan has been used, you’re only charged interest on that $100,000.
Tips to Maximise Your Borrowing Power
Want to boost your borrowing capacity and improve your chances of home loan approval? Here are a few smart steps:
✅ Pay down existing debts – Reduce credit card balances or personal loans
✅ Save a larger deposit – The more you save, the more you can borrow (and the less you’ll pay in LMI)
✅ Check your credit score – Ensure it’s in good shape before applying
✅ Get pre-approved – This gives you a clear idea of your borrowing limit and helps you plan better
Every little improvement adds up, taking action now can open more doors when you’re ready to buy.
Why It Pays to Speak to a Broker Early
Construction loans have more moving parts than a standard home loan, so it helps to have an expert in your corner from day one.
At Loan Gallery, our brokers understand the ins and outs of building finance. We’ll:
- Review your financial situation
- Help you find lenders that suit your goals
- Guide you through paperwork and pre-approval
- Make sure your loan aligns with your budget, land, and build plans
Ready to Start Building?
Your dream home is unique, and so is your financial situation. If you’re planning to build, it’s important to understand your borrowing capacity before you begin. The team at Loan Gallery are experienced home loan specialists who can help you navigate your options, clarify your finances, and find the best loan solution tailored to your needs.
With a focus on clear guidance and personalised support, Loan Gallery can help you save time and avoid costly surprises, giving you the confidence to move forward with your build.
Contact a Loan Gallery expert today to start your journey with confidence.
