What is a construction loan?
A construction loan (or building loan) is a mortgage designed for people building a new home. Unlike a standard mortgage where you receive the full amount at settlement, a construction loan is drawn down in stages as the build progresses.
How the drawdown process works
Your builder typically invoices at key stages of construction. Common drawdown stages include:
- Deposit / foundations — 5–15% of the build cost
- Floor down / framing — 20–30%
- Roof and exterior — 20–25%
- Interior fit-out — 15–20%
- Practical completion — 10–15% (final payment)
At each stage, the bank releases funds to the builder after verifying the work is complete (often via an independent valuation or building inspector).
Interest during construction
You only pay interest on the amount drawn down, not the total loan. So in the early stages when only the foundations are done, your interest payments are small. As more stages are completed, the interest increases. Most construction loans are on floating or short-term fixed rates during the build phase.
Land and build packages
If you're buying land and building, you may need:
- Land loan — to purchase the section
- Construction loan — to finance the build
Some banks combine these into a single facility. Others treat them as separate loans. The land is typically purchased first, with the construction phase starting once consents are obtained.
What banks want to see
- Fixed-price building contract — banks strongly prefer this to manage cost blowout risk
- Council-approved plans and consents
- Builder credentials — licensed building practitioner (LBP), insurance, track record
- Registered valuation — of the completed property (as-if-complete value)
- Your standard mortgage documents — income proof, deposit evidence, etc.
LVR advantages for new builds
New builds have historically received more favourable LVR treatment from the RBNZ. First home buyers building new may be able to borrow with as little as 10% deposit, compared to 20% for existing properties.
Tips for a smooth construction loan
- Build a contingency buffer of 5–10% above the contract price
- Get a fixed-price contract wherever possible
- Stay in close contact with your bank during the build
- Keep records of all variations and changes
- Consider a project manager or independent building inspector
Frequently asked questions
How does a construction loan (or building loan) work in New Zealand?
A construction loan is drawn in stages (tranches) as construction progresses, typically at foundation, frame, weathertight, and completion stages. You pay interest only on the amount drawn (not the full loan), reducing interest costs during the build. Once complete, the loan converts to a standard mortgage with principal + interest repayments.
What is a drawdown and how many drawdowns does a typical build have?
A drawdown is a release of funds from your construction loan, tied to construction milestones verified by a lender's inspector. Typical builds have 4–6 drawdowns: deposit/start, foundation, frame, weathertight, fitout, and final completion. Each drawdown is inspected to confirm the builder has earned the funds.
How much interest do I pay during the construction phase?
You pay interest only on drawn amounts, making construction loans cheaper than upfront mortgages during the build phase. For a $500,000 build taking 12 months with staged draws at 6.5%, you might pay only $8,000–$12,000 interest during construction (versus $32,500+ if you borrowed the full amount upfront).
What is the LVR on a construction loan and is it different from a standard mortgage?
Construction loans typically have the same LVR limits as standard mortgages (80–90% LVR depending on your circumstances), calculated on the total build cost plus land value. Some lenders are stricter, requiring 20% deposit upfront. Confirm LVR requirements with your lender before committing to a build.
What happens if my build goes over budget?
If costs exceed your loan amount, you must find additional funds (personal savings, second loan, developer agreement). Most lenders won't increase construction loan limits mid-build. Plan for 10–15% cost contingency and discuss overrun procedures with your builder and lender before construction starts.
Explore construction loan options
Compare construction loans from lenders and get pre-approval for your building project.