Construction Loan vs Home Loan: 8 Key Differences Every Canberra Homebuyer Should Know

Deciding between a construction loan and a home loan can be a pivotal choice, especially if you're planning to build in Canberra. Both loan types come with unique structures, payment schedules, and requirements that can influence your financial plans. 

That’s where experienced brokers come in—they simplify the details, offer tailored advice, and help you compare loan options that fit your specific needs. 

While both a construction loan and a home loan aim to help you finance your property, the differences between them are significant, especially when you’re building. Let’s explore the 8 key differences - and everything else you need to know about these loans - before making your choice. 

Canberra Property Market 2025: A Blend of Home Loans and Construction Loans for Homebuyers

The Canberra property market remains strong in 2025, with both new builds and existing homes in high demand. The median house price has surged to $980,000 according to a CoreLogic 2024 Report. 

As property prices rise, homebuyers face critical choices between purchasing an established home or building from scratch, especially in growth suburbs like Denman Prospect and Taylor, where land development is thriving.

Whether you're eyeing a new build in a developing suburb or a charming home in Canberra's older areas, it’s crucial to carefully weigh your loan options. Choosing between a home loan or a construction loan will directly impact your finances, repayment structure, and overall property experience.

A thoughtful decision here can save you from potential financial pitfalls as you navigate the Canberra market.

8 Key Differences: Construction Loan vs Home Loan

With the market overview in mind, let's explore the 8 key differences between a construction loan and a home loan to guide you in making a well-informed decision.

1. Loan Structure and Payments

One of the biggest differences between a construction loan and a regular home loan is the structure and how payments are made. With a standard home loan, the entire loan amount is provided upfront. You begin making monthly repayments (both principal and interest) immediately after settlement.

In contrast, a construction loan is released in stages, known as progress payments, based on the stages of the building process. You only pay interest on the amount drawn down during the construction period, not on the full loan amount. This staged payment process helps with cash flow management but can be more complex.

Example: 

If you're building a home on a block of land in Canberra, the loan might start paying out when the slab is laid, then at frame completion, followed by lock-up and finally at practical completion. 

2. Loan Terms and Interest Rates

 

The loan term and interest rates differ between these two loan types. Construction loans tend to have shorter loan terms, often up to 12 months for the construction phase. The interest rates for construction loans are typically higher than those for a conventional mortgage loan due to the increased risk for the lender during the construction process. 

Once the building is complete, the loan often converts to a regular home loan, with standard loan interest rates and longer repayment periods.

Example:

Construction loans in Canberra in 2025 are generally offered at around 6.5% interest during the build phase, while traditional home loans range from 5.25% to 5.75%.

3. Loan Application Process and Requirements 

When applying for a construction loan, the application process tends to be more involved than a regular home loan. You’ll need to provide detailed plans, a building contract, council plans, and possibly proof of building insurance before the loan is approved. 

Additionally, lenders often have stricter requirements when it comes to your credit score and proof of income, as the construction process carries more risk. They may also assess the cost of construction closely to avoid cost overruns.

In comparison, with a standard mortgage, you typically just need to demonstrate your financial capacity through income verification and provide documentation for the property you intend to purchase.

4. Payment Schedule  

With a construction loan, the payment schedule is closely tied to the stages of construction. You’ll need to meet progress payment schedules at each major building milestone, such as site preparation, roofing, and internal fittings.

This is also known as a progressive drawdown, where funds are released progressively as the build moves along. In contrast, with a regular home loan, the repayment schedule is typically the same every month, starting after settlement.

5. Loan Amounts and Valuation 

 

For construction home loans, the lender will evaluate the projected value of the completed property, which means the loan amount is based on the final worth of the home. This can make the loan amount flexible, but you’ll need to present original plans and projected building costs for approval.

Meanwhile, with a standard home loan, the amount you can borrow is based on the current market value of the existing property. The total loan amount is fixed upfront.

6. Repayments During Construction 

During the construction phase, you only make interest payments on the funds that have been drawn down, helping to keep monthly repayments lower until the home is finished. Once the construction is complete, the loan transitions to standard principal-and-interest repayments.

With a regular home loan, you immediately start paying both loan principal and interest from the outset.

7. Risk of Construction Delays 

One of the challenges with construction loans is the possibility of cost overruns and construction delays. This can lead to an extended loan period and higher costs. Lenders also tend to apply stricter checks and may require changes to construction plans if they feel the project isn’t progressing as expected.

On the flip side, a traditional home loan is more straightforward, as the property is already complete, and delays or building project issues don’t come into play.

8. Lenders Mortgage Insurance (LMI) 

Both construction loans and regular home loans can require Lenders Mortgage Insurance (LMI) if you’re borrowing more than 80% of the property’s value. However, with construction loans, the LMI premium may be calculated on the anticipated value of the completed project, which could be higher than the initial loan amount.

With a standard mortgage, LMI is based on the purchase price of the home and the amount you’re borrowing.

Pros and Cons: Construction Loan vs Home Loan

Here’s a quick summary of the main pros and cons of a construction loan and a home loan to help you further understand which option might suit your situation best. 

Construction Loan: Pros and Cons

Pros:

• Pay interest only on the amount drawn during each construction stage.
• Flexible release of funds to match building progress.
• Tailored specifically for new builds and major renovations.

Cons:

• Higher interest rates during the construction phase.
• More paperwork, requiring detailed building plans and contracts.
• Stricter lender requirements due to the complexity of the build.

Home Loan: Pros and Cons

Pros:

• Lower initial interest rates compared to construction loans.
• Easier and faster approval process.
• Suitable for purchasing existing homes with fewer steps.

Cons:

• Full loan amount is disbursed upfront, regardless of property condition.
• Immediate repayments of principal and interest from the start.
• Not ideal for major renovations or new constructions.

Each loan type has its strengths and limitations. Understanding these can help clarify which option is better suited to your specific needs.

Case Study: Building a New Home in Canberra

In 2025, Canberra couple Sarah and Ben decided to build their first home in the suburb of Denman Prospect. With construction costs estimated at $700,000, they opted for a construction loan.

Their lender released funds in five progressive payments: 

• $50,000 at slab completion 
• $150,000 at frame and roof stage 
• $200,000 at lock-up stage 
• $150,000 at internal fittings 
• $150,000 at practical completion 

During the 12-month construction phase, they only paid interest on the funds drawn down, which helped ease their cash flow. Once the home was finished, the loan converted into a standard principal-and-interest loan, and they began regular monthly payments.

If Sarah and Ben had opted for a standard home loan to purchase an existing property, they would have paid the full loan amount and started repayments immediately.

FAQs

How do repayments on a construction loan work?

During construction, you only pay interest on the funds drawn down at each stage. Once the home is complete, the loan usually converts to a standard principal-and-interest repayment.

Why would you get a construction loan?

A construction loan is ideal if you’re building a new home or doing major renovations, as it provides funds progressively throughout the build. This helps manage cash flow and reduces initial interest costs.

Can you pay extra on a construction loan?

Yes, many lenders allow extra payments during the construction phase, but it depends on your loan agreement. Check with your lender to confirm any limits or fees for additional repayments.

How much can I borrow to build a house?

The amount you can borrow is typically based on your income, credit score, and the projected value of the completed property. Most lenders allow you to borrow up to 80-90% of the final property value.

What type of loan is best for building a house?

A construction loan is generally the best option for building a house, as it’s designed specifically for new builds and major renovations. It provides funds progressively as construction progresses, easing cash flow.

Can you pay extra on a construction loan?

Yes, extra payments are often allowed, but terms can vary between lenders. It's important to verify your loan’s conditions regarding early or extra repayments.

What is the maximum term for a construction loan?

The construction phase typically lasts 12 to 18 months, but once the build is finished, the loan converts to a regular mortgage with a term of 25-30 years.

Conclusion

Choosing between a construction loan and a home loan is a significant decision that impacts both your finances and your future home. Whether you're building from scratch or buying an existing property in Canberra, understanding the differences is key to making the right choice. 

If you're still unsure which option is best for you, we’re here to help. Contact Home Loan Brokers Canberra at 02 6173 6397 or visit us at Home Loan Brokers Canberra for expert advice and personalised loan options that fit your needs.