Construction Loans for KDR: How They Work

One of the most confusing aspects of a knockdown rebuild is financing it. Unlike buying an existing home where you borrow a lump sum, a construction loan is structured as a series of progress payments — and understanding this structure is essential to managing your cash flow.

How a Construction Loan Works

Instead of receiving the full loan amount upfront, your lender releases money in stages — called "drawdowns" — that correspond to construction milestones. The typical stages are:

1. Deposit/Slab: 5–10% at contract signing and slab pour
2. Frame: After wall and roof frames are erected
3. Lock-up: When the building is weather-tight (windows, doors, roof)
4. Fit-out: After internal work (plasterboard, kitchen, bathrooms)
5. Completion: Final handover and all finishes complete

During construction, you only pay interest on the funds drawn down — not the full loan amount. This significantly reduces your interest costs during the build period.

The KDR Complication: You Still Own the Land

Unlike buying a house-and-land package, in a KDR you already own the land (or are buying it separately). This means:

• You may have an existing mortgage to manage during the build
• Your land value contributes to the LVR (loan-to-value ratio) calculation
• Lenders will need a valuation of the end value of the completed project

What Lenders Look At

Lenders assess construction loans differently. Key factors:

• Fixed-price building contract: Most lenders require this. Progress payments are tied to contract milestones.
• Licensed builder: The builder must be licensed and insured
• End-value valuation: Lender will commission a "as if complete" valuation
• Contingency buffer: Many lenders require or strongly recommend a 10–15% cost buffer in your budget

Bridging Finance

If you're living in your home while planning the rebuild, you may need bridging finance to fund the demolition and early construction phase while you're renting elsewhere. This is expensive — typically 1–2% above standard rates — so minimise the bridge period where possible.

Practical Tips

• Use a mortgage broker who specialises in construction lending — standard brokers often don't know the nuances
• Get your finance pre-approved before signing with a builder
• Factor in the "progress payment gap" — the time between when your builder invoices and when your lender pays them
• Keep a cash buffer of at least $30,000–$50,000 for variations and unexpected costs