Construction Loans in Australia

What Is a Construction Loan?

A construction loan is a loan facility used to fund building works rather than the purchase of a completed property.

In private lending, construction loans are typically:

• Secured against the underlying land and improvements

• Drawn progressively as construction milestones are met

• Short to medium term in nature

• Structured around a clearly defined exit

Private construction loans may be structured as first or second mortgages depending on existing security and lender requirements.

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When Are Construction Loans Used?

Construction loans are used when the timing, structure, or risk profile of a project falls outside bank lending criteria.

Common scenarios include:

• Residential builds without sufficient presales

• Commercial or mixed-use developments requiring flexible draw schedules

• Owner-builder or bespoke construction projects

• Time-sensitive builds where bank approvals are delayed

• Projects requiring interim funding pending refinance

Private construction finance is typically used as a transitional solution rather than long-term debt.

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How Private Lenders Assess Construction Loan Risk

Private lenders assess construction loans differently to standard property loans due to construction, cost, and timing risks. Key considerations include:

Project Feasibility

Lenders review:

• Building contracts and specifications

• Builder experience and track record

• Project timelines and contingencies

Clear documentation and realistic costings are essential.

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Loan-to-Value Ratio (LVR)

Construction loans are assessed on conservative LVR limits, often based on:

• Current land value

• On-completion value

• Peak debt exposure during construction

Where construction funding sits behind an existing loan, it may involve a second mortgage loan, which requires additional caution due to subordinate security.

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Exit Strategy

The exit strategy underpins all construction lending.

Acceptable exits commonly include:

• Refinance into a completed-asset facility

• Sale of the completed property

• Capital injection following construction

For a broader explanation of how exit strategies are assessed, see Private Lending in Australia.

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LVR and Security Considerations for Construction Loans

Construction loans carry layered risk due to changing asset value during the build.

Private lenders typically require:

• Independent valuations at appropriate stages

• Conservative assumptions around end values

• Clear buffers above peak debt

A first mortgage private loan may allow higher leverage once construction is complete. During construction, stricter controls are applied to manage downside risk.

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Exit Strategy Requirements

Every construction loan must be structured with a realistic and time-bound exit.

Private lenders closely assess:

• The likelihood of refinance on completion

• Market demand for the finished asset

• The borrower’s capacity to absorb delays or cost overruns

Construction loans are commonly declined where exit strategies rely on optimistic valuations or untested assumptions.

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Common Reasons Construction Loan Applications Are Declined

Construction loan applications may be declined for several reasons, including:

• Inadequate equity or insufficient buffers

• Weak or incomplete project documentation

• Unproven builder capability

• Unrealistic construction timelines or budgets

• No clear post-construction exit

These issues are structural and can often be addressed through better planning and structuring.

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How Construction Loans Are Structured

Private construction loans are typically structured as:

• Short to medium-term facilities, often 6 to 24 months

• Progressive drawdowns aligned with build stages

• Interest-only or capitalised interest arrangements

• First or second mortgage security

Pricing reflects project complexity, construction risk, funding speed, and loan duration. Construction loans are designed to support delivery, not to replace long-term finance.

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How Innovate Funding Structures Construction Loans

Innovate Funding structures construction loans by focusing on feasibility, risk control, and exit clarity.

This includes:

• Reviewing project documentation and build contracts

• Assessing peak debt and contingency exposure

• Structuring draw schedules aligned with milestones

• Matching projects with appropriate private lenders

Each construction loan is structured to support completion and a clean transition to the exit strategy.

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Construction Loans – Frequently Asked Questions

Can private construction loans fund owner-builder projects?
Yes. Some private lenders will consider owner-builder projects, subject to experience and documentation.

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How quickly can construction loans settle?
Once valuations and documentation are complete, settlement can occur within days.

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Do construction loans require presales?
Not always. Presale requirements vary depending on project risk and exit strategy.

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Can construction loans be refinanced after completion?
Yes. Many construction loans are designed to be refinanced into longer-term facilities once the project is completed.

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Are private construction loans expensive?
They typically carry higher costs than bank construction loans due to flexibility, speed, and risk profile.

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Understanding Your Options

Construction loans play a critical role within Australia’s private lending market by enabling projects to proceed where traditional funding is unavailable or impractical.

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When structured correctly, private construction finance provides the flexibility required to deliver projects on time while maintaining a clear pathway to exit.

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For a broader understanding of how construction loans fit within private finance, visit Private Lending in Australia.