How a land and construction loan works in two parts

Vacant land is financed at 80 per cent LVR at most lenders for standard residential blocks, higher with LMI at some, and lower for large or rural land. If the construction component is approved at the same time, the land settles under the combined facility with the build funds undrawn. If it is not, the land loan stands alone and the construction component is added by a later application. Buying with the full facility approved avoids a second application and the risk of policy changing between the two.

The lender needs the fixed price building contract, plans and specifications, council approval, builder's insurance and an on-completion valuation before construction funds are released. The construction component is sized on the lower of cost and on-completion value, with the land loan included in the total LVR. Once approved, draws follow the standard progress schedule and interest is charged on the drawn balance.

Most lenders require construction to commence within six to twelve months of land settlement and complete within twelve to twenty-four months of commencement. Land loans without a construction component often have higher rates or a review after a period, because the lender is holding a non-income-producing security. If the build is delayed, tell the lender before the deadline; extensions are usually available but not automatic.

A package sold by a developer with a builder attached is still financed as a land and construction loan in two parts: the land contract settles first, the building contract funds progressively. Lenders check that the two contracts are separate, because a single contract for a completed home is a different product with different deposit and stamp duty consequences.