Construction loan interest is usually charged only on the amount you have drawn so far, so your repayments start small and grow as the build progresses. The headline rate is only one part of the cost; drawdowns, fees and the end of the build also change the real cost.
Lender terms such as rates, fees and the number of drawdowns differ between lenders, so the points below are worth raising before you sign a building contract.
Why Does a Construction Loan Interest Rate Work Differently?
A construction loan is paid out in stages as the builder completes work, and interest is generally calculated on the balance drawn at the time, not the full approved amount. Each lender sets its own rate, fees and drawdown rules, so these are worth confirming in writing.
NSW Government guidance says a borrower financing a project home must start mortgage repayments once the first progress payment is made and the loan begins to be drawn. Check your lender's requirements before relying on a long period of no repayments.
Our construction loans for pharmacists page explains how we compare options from lenders across Australia.
Mistake One: Comparing Only the Rate
Comparing only the advertised rate can hide fees and conditions that change the total cost. Ask about any fee for each progress payment, valuation or inspection charges, and what rate applies once the build ends.
Building Commission NSW gives $250 to $500 as an indicative cost of each progress inspection. Lender inspection fees may differ, so ask what your lender charges and who arranges the inspections.
How Do Drawdowns Change Your Repayments?
Each drawdown adds to your balance, so your interest bill rises with every stage. A fixed price contract with set stages gives you a clearer forecast than a contract where costs can move.
Consider a pharmacist building on land they already own, with a $600,000 loan. Using an illustrative rate of 6.75% p.a., interest on the full amount would be about $3,375 a month. Early in the build, after a 5% deposit stage of $30,000 is drawn, monthly interest is about $169. After the base and frame stages bring the balance to $300,000, it is about $1,688. Once the loan is fully drawn, it reaches the full $3,375.
The solution in this scenario is to build a monthly budget at each stage, not just at the end. The outcome is that the borrower knows the cash needed at each stage and does not rely on the first, smaller bills as a guide. The rate is illustrative only, and your actual rate will depend on your deposit and lender.
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Mistake Two: Ignoring Rent or Mortgage Costs During the Build
You may be paying rent or an existing mortgage while interest on the new loan builds.
If you are selling your current home to fund the build, a bridging loan may be an option, though it adds interest and fees while you hold both debts. If you have equity in your existing property, equity release is another way to fund a deposit, with the trade-off of a larger total debt.
Do Serviceability Rules Apply to a Construction Loan?
Yes. Banks must still assess whether you can afford the loan, and APRA requires authorised deposit-taking institutions to test new borrowers at a rate at least 3 percentage points above the loan rate. APRA confirmed this buffer remained in place on 28 May 2026.
This means your borrowing power is tested at a rate well above the one you will pay. Overtime and bonus income may be discounted. APRA says a prudent lender would discount less stable income such as this by at least 20 per cent. For oncology pharmacists who earn extra through on-call or additional shifts, it is worth checking how a lender treats that income. Our borrowing capacity page covers what lenders look at.
Interest-Only Repayments During a Build: The Trade-Off
Some lenders offer interest-only repayments during construction, which keeps repayments lower while the build runs. The trade-off is that you are not reducing the loan balance, and later principal and interest repayments are calculated over a shorter remaining term, so they are higher.
As an illustration, a $600,000 loan at 6.75% p.a. over 30 years has principal and interest repayments of about $3,892 a month. After one year of interest only, the remaining 29 years carry repayments of about $3,934 a month. Interest-only costs about $3,375 a month on the full balance during that year. Our interest only loans page has more detail on this option.
Do Payment Schedules Affect Your Loan?
Yes. Your builder's payment schedule sets when your lender releases funds, and state rules limit deposits and require payments to match completed work. In NSW the maximum deposit is 10 per cent, while in Queensland it is 5 per cent for contracts of $20,000 or more.
Victoria currently caps the deposit at 5 per cent for contracts of $20,000 or more, with payments tied to completed stages. Changes to the Victorian rules have been deferred to 31 March 2027. Check the rules in your state before you agree to any schedule that asks for money ahead of work.
Grants and Schemes That May Help With Your Deposit
A first home owner grant may reduce the amount you need to borrow if you qualify. In NSW the grant is $10,000, and for vacant land with a building contract the combined value of land, contract and variations must not exceed $750,000. Other states have different amounts and caps, so check your state revenue office.
The Australian Government 5% Deposit Scheme lets an eligible buyer borrow with a deposit as low as 5%. A smaller deposit means a larger loan, not a smaller one. The scheme lists house and land packages as supported property types, and Housing Australia says investment properties are not eligible. Read our 5% deposit scheme page for how it may apply to you.
A lower deposit can mean lenders mortgage insurance, so weigh that cost against the benefit of starting sooner.
If you are planning to build, talk to us before you sign a contract, because a lender can look at your drawdown schedule and fees before the numbers are locked in. Call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
Do you pay interest on the full construction loan amount straight away?
Usually not. Interest is generally charged on the amount drawn as each stage of the build is paid. Your repayments grow as more of the loan is drawn, and lender terms vary.
Can I use interest-only repayments during construction?
Some lenders offer them. The trade-off is that you do not reduce the balance, and later principal and interest repayments are worked out over a shorter remaining term, so they are higher.
Do banks still test my ability to repay a construction loan?
Yes. APRA requires banks to assess new borrowers at a rate at least 3 percentage points above the loan rate. Less stable income such as overtime may be discounted.
What fees should I ask about besides the rate?
Ask about fees for each progress payment, valuation and inspection charges, and the rate that applies after the build ends. These vary between lenders.
