Construction Loan Borrowing Power Explained

Why Construction Loan Borrowing Power Matters

Borrowing power directly affects:

• The size and design of your build

• Whether your plans are affordable

• How much deposit or equity you need

• Whether your loan will be approved at all

Many borrowers assume they can afford a build based on construction quotes alone. In reality, lenders assess the project conservatively, factoring in buffers, interest rate rises, and potential cost overruns.

This is especially important for:

• First-time builders

• Owner-builders

• Knock-down rebuild projects

• Fixed-price vs cost-plus contracts

How Construction Loan Borrowing Power Is Calculated

Lenders generally assess construction loan borrowing power using the following steps:

1. Income assessment
   Your employment income, bonuses, rental income, and other verified earnings are assessed.

2. Expense review
   Living expenses, credit cards, personal loans, HECS debts, and existing mortgages are factored in.

3. Interest rate buffer
   Your loan is assessed at a higher interest rate than the current rate to ensure affordability.

4. Deposit or equity contribution
   Lenders usually require a minimum deposit or usable equity, often 20% including land and build costs.

5. Valuation of the completed property
   The lender values the property as if construction is complete, not just the land value.

6. Loan-to-value ratio limits
   Borrowing power is capped by how much the lender is willing to lend against the final value.

How Construction Loans Differ From Standard Home Loans

• Funds are released in progress payments, not one lump sum

• Interest is charged only on the amount drawn, not the full loan

• Valuations can be more conservative

• Build contracts and council approvals are required upfront

• Cash flow planning is more important

These differences mean borrowing power for construction is often lower than for a standard purchase, even with the same income.

Common Follow-Up Questions

How much can I borrow for a construction loan?

This depends on your income, debts, deposit or equity, and the lender’s assessment of the completed property value. Most borrowers can borrow up to 80% of the total land and build value without additional costs.

Does construction loan borrowing power include the land?

Yes. Borrowing power is usually assessed on the total project cost, which includes the land purchase price and the construction contract.

Is borrowing power lower for construction loans?

In many cases, yes. Lenders apply stricter rules, higher assessment buffers, and conservative valuations, which can reduce borrowing capacity compared to buying an established home.

Can I increase my construction loan borrowing power?

Borrowing power may improve by:

• • Reducing existing debts

  • Increasing your deposit or equity

  • Using a fixed-price building contract

  • Adjusting build specifications

  • Choosing a lender with more flexible assessment rules

Do progress payments affect borrowing power?

Progress payments do not change borrowing power, but they affect cash flow. You must be able to service repayments as the loan balance increases during construction.

Pros, Risks, and Key Considerations

Pros

• Interest is only charged on drawn funds

• Flexible loan structure during build

• Can fund land and construction together

Risks and Considerations

• Cost overruns can exceed approved borrowing power

• Valuations may come in lower than expected

• Delays can impact loan terms and cash flow

• Higher upfront documentation requirements

Understanding borrowing limits early reduces approval risk and helps align your build plans with lender expectations.

Construction loan borrowing power determines how much you can borrow to build a home, based on your finances and the final value of the completed property. Because construction loans are assessed differently from standard home loans, borrowing capacity is often more conservative. Knowing your borrowing power early helps prevent budget blowouts, approval issues, and build delays.