Do you know how land and construction finance works?

Purchasing land for townhouse construction is different from buying a finished home

You're not settling once and moving in. You're settling on land, then drawing down construction funds in stages as the build progresses. That means two sets of approvals, two timelines, and a loan structure that releases money progressively rather than all at once.

The land purchase settles first. You'll need the deposit and settlement costs ready, just as you would with any property purchase. Once the land is yours, the construction phase begins, and that's when the construction loan structure kicks in. Funds are released at specific milestones, slab down, frame up, lock-up, and so on, and you only pay interest on what's been drawn. If $200,000 has been released and $400,000 is still sitting in the facility, you're only charged on the $200,000.

Consider a buyer purchasing a corner block in Mount Eliza with council approval already in place for a dual-occupancy townhouse build. The land settled at $650,000, and the construction contract was signed at $720,000. The lender required a 20% deposit across the total project cost, which came to around $274,000. Once the land was in the buyer's name, the builder triggered the first progress payment at slab stage, and the lender released $144,000 directly to the builder. At that point, interest charges began on the drawn portion, while the remaining funds sat untouched in the construction facility.

Council approval and development applications need to be in place before most lenders will proceed

Lenders want to see that the project is viable and that you're allowed to build what you're proposing. That means a development application lodged and approved, or at minimum, well progressed. If you're purchasing land with the intent to subdivide and build two townhouses, the DA needs to show that council has signed off on the subdivision and the building design.

Mount Eliza sits within the Mornington Peninsula Shire, and the local planning scheme can be particular about site coverage, setbacks, and vegetation overlays, especially on larger blocks close to bushland or the foreshore. If your land falls within a neighbourhood character overlay or has native vegetation, expect the DA process to take longer. Lenders won't release construction funds until they've seen evidence that all planning conditions have been met.

Fixed price building contracts are strongly preferred by most lenders

A cost-plus contract, where the final build cost fluctuates depending on materials and time, introduces uncertainty that most lenders won't accept for construction finance. They want a fixed price contract with a registered builder, a clear progress payment schedule, and a defined completion date.

The contract should outline each stage of the build and the corresponding drawdown amount. Typical stages include base, frame, lock-up, fixing, and completion. Each time the builder hits a milestone, they'll request a progress payment. The lender will send a valuer or building inspector to confirm the work has been completed to the agreed standard, then release the funds directly to the builder. You won't handle the money yourself.

Only interest is charged during the construction period, and only on funds already drawn

During the build, most lenders offer interest-only repayment options on the drawn portion of the loan. That keeps your repayments lower while the property isn't yet generating income or providing somewhere to live. Once construction is complete and the occupancy certificate is issued, the loan converts to a standard principal and interest home loan, though you can usually choose to remain on interest-only for a set period if the property is being held as an investment.

Progressive Payment Schedules are structured so that the largest portion of the loan is drawn toward the end of the project. Early-stage payments cover groundwork and frame, but the bulk of the cost comes during lock-up and fixing when plumbers, electricians, and finishers are all on site. That staging protects both you and the lender. If something goes wrong mid-build, the lender hasn't released the full amount, and you're not left overdrawn on an incomplete asset.

Most lenders charge a Progressive Drawing Fee each time funds are released

This typically sits between $300 and $500 per drawdown, and it covers the cost of the progress inspection and the administrative work involved in releasing funds. Over a five-stage build, that's $1,500 to $2,500 in fees, and it's worth factoring into your overall budget. Some lenders cap the number of free drawdowns and charge beyond that. Others charge per inspection regardless.

If you're planning to build two townhouses on the one title before subdividing, some lenders will treat the project as a small-scale development rather than an owner-occupier build. That can mean higher interest rates, a larger deposit requirement, or a request for presales or a quantity surveyor's report. It's not a rejection, it's just a different loan category, and it's worth knowing that before you sign the land contract.

You'll need to commence building within a set period from the loan settlement

Most construction loan approvals include a condition that building must start within six or twelve months of the land settlement. If you're still waiting on council sign-off, or the builder's schedule has pushed out, that timing can become tight. Some lenders will extend the commencement window if you can show that delays were outside your control, but it's not automatic.

In Mount Eliza, where builder availability can be stretched, especially for custom or dual-occupancy projects, it's worth having your builder locked in and your construction contract signed before you settle on the land. That way, the clock starts ticking when you're actually ready to build, not when you're still organising trades and materials.

The loan converts to a standard mortgage once the build is complete and the final inspection is passed

Once the occupancy certificate is issued and the lender is satisfied that the project is finished, the construction facility closes and the loan rolls into a standard home loan structure. At that point, you'll move onto principal and interest repayments unless you've arranged to stay on interest-only.

If you're building to sell, you'll want to time the completion and settlement carefully so that you're not carrying two or three months of unnecessary interest after the project is done. If you're building to hold, the conversion to a standard investment loan or owner-occupier loan happens automatically, and your repayments adjust accordingly.

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