Top tips to finance a renovation project purchase

Buying a property to renovate requires a different loan structure to a standard home purchase.

A construction loan releases funds progressively as the renovation advances, which means you only pay interest on the amount drawn down rather than the full loan from day one. This structure suits buyers purchasing a property with the intention of immediate renovation or extension work. If you're looking at a weatherboard cottage near Croydon Station or a post-war home near Civic Square that needs updating, the way you fund the purchase and the renovation needs to align with how builders are paid and how lenders release funds.

How construction loans differ from standard home loans

A construction loan operates on a progressive drawdown. Instead of receiving the full loan amount at settlement, funds are released in instalments as your builder completes defined stages of work. Each drawdown is triggered by a progress inspection conducted by the lender's valuer, who confirms that the work matches the stage outlined in your building contract. You'll pay interest only on the amount drawn down to date, which keeps your repayments lower during the build phase.

The structure also requires you to have council approval and a fixed price building contract with a registered builder before the loan can be approved. Lenders want certainty around cost, timeline, and the builder's qualifications. Construction loans are not typically available for owner builder projects unless the borrower holds trade qualifications, as lenders consider the risk too high without a licensed builder managing the work.

What a progress payment schedule looks like in practice

Consider a buyer who purchases a three-bedroom home in Croydon for renovation. The purchase price is at the local median, and the renovation budget is quoted at $180,000 by a registered builder. The lender structures the loan to cover both the purchase and the renovation cost. The builder provides a fixed price contract with a progress payment schedule typically broken into five stages: base stage (including slab or foundation work), frame stage, lock-up stage (external walls and roof), fixing stage (internal fit-out), and practical completion.

Each stage is worth a percentage of the total build cost. The base stage might be 15%, frame stage 20%, lock-up 35%, fixing 25%, and final completion 5%. After each stage is finished, the builder submits a progress claim. The lender arranges an inspection, and once the valuer confirms the work is complete, the lender releases that portion of the funds directly to the builder. The buyer's interest repayments increase with each drawdown, but the cost remains lower than if the full loan amount had been drawn at settlement.

Most lenders charge a Progressive Drawing Fee for each inspection and drawdown, typically between $300 and $500 per stage. Over five stages, that adds $1,500 to $2,500 to your overall project cost, which should be factored into your budget from the outset.

Timing the purchase and the start of construction

Most construction loan approvals require you to commence building within a set period from the Disclosure Date, often 12 months. If you're purchasing a property in Croydon with the intention to renovate, that means you need to have your builder locked in, your plans drawn, and council approval either granted or well progressed before you settle on the property. Delays in obtaining a development application or council plans can push your project past the lender's timeframe, which may require a loan variation or reapproval.

In our experience, buyers underestimate how long the approvals process takes, particularly in areas where council requirements are detailed or where heritage overlays apply. Croydon sits within the Maroondah City Council area, and approval timeframes can vary depending on the scope of work and whether neighbours lodge objections. If your renovation involves a second storey addition or significant rear extension, factor in at least three to four months for the full approvals process.

Matching your deposit and buffer to the loan structure

Because a construction loan covers both the purchase and the build, the lender assesses your borrowing capacity based on the combined amount. Your deposit needs to meet the lender's loan-to-value ratio requirements, which is typically 80% to avoid lenders mortgage insurance, though some lenders will go to 90% with LMI for strong applicants. The deposit is calculated against the total project cost, not just the purchase price.

You'll also need a cash buffer to cover costs that fall outside the construction loan. These include the Progressive Drawing Fee, any cost overruns if variations are required, and holding costs such as rates and insurance while the property is being renovated. If you're living elsewhere during the build, you'll need to cover both your accommodation costs and the loan repayments as each stage is drawn.

Interest-only repayments during construction and the switch to principal and interest

During the construction phase, most lenders offer interest-only repayment options. You're only paying interest on the amount drawn down so far, which keeps your repayments manageable while the property is uninhabitable. Once the build reaches practical completion and the final drawdown is made, the loan converts to a standard principal and interest home loan with a term of 25 or 30 years.

The interest rate during construction is typically variable, though some lenders allow you to fix the rate once the loan converts to principal and interest. If refinancing to a lower rate or different loan structure after completion is part of your plan, make sure your construction loan doesn't have prohibitive exit fees or restrictions on refinancing within the first year.

Choosing the right builder and contract structure

Lenders will only approve a construction loan if you're using a registered builder with appropriate insurance. They require a fixed price building contract, not a cost plus contract, because a cost plus arrangement introduces uncertainty around the final loan amount. The fixed price contract protects both you and the lender from cost blowouts, though it's important to clarify what's included in that fixed price and what counts as a variation.

Variations are common in renovation projects, particularly when structural issues are discovered once walls are opened up. If your builder identifies additional work that wasn't included in the original scope, that variation needs to be agreed in writing and funded separately unless you have a buffer built into your loan. Some buyers structure their loan with a small contingency amount to cover minor variations, which can be drawn down if needed or left untouched if the project runs to plan.

Call one of our team or book an appointment at a time that works for you to discuss how a construction loan can be structured around your renovation project and the property you're purchasing in Croydon.

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