A knockdown rebuild purchase requires two separate transactions financed through a single construction loan: you're buying the existing property, then demolishing and rebuilding before settlement occurs.
Most lenders structure this as a land and construction package where funds release in stages as the build progresses. You'll pay interest only on amounts drawn down, which means your repayments start low and increase with each progress payment. The final drawdown happens at practical completion, at which point the loan converts to a standard home loan with principal and interest repayments.
How the Purchase and Build Timeline Works
You exchange contracts on the property with the existing dwelling, then your builder prepares detailed plans and submits the development application to Whitehorse City Council. Once council approval is granted and your lender approves the building contract, settlement occurs on the land purchase. Demolition follows immediately, then construction begins according to the fixed price building contract.
Consider a buyer purchasing a 1950s weatherboard in Blackburn with plans to replace it with a two-storey family home. They exchanged on the property in February, council plans were submitted in March, and approval came through in May. Settlement occurred in June once the lender confirmed the building contract met their requirements. Demolition took two weeks, and the slab was poured by late July. Each stage triggered a drawdown from the construction loan, with the buyer paying interest only on the累 累mulative amount released.
What Lenders Assess Before Approving the Loan
Lenders evaluate both your capacity to service the loan and the viability of the completed project. They'll require a registered builder working under a fixed price contract, a council-approved building permit, and evidence that the finished property will be worth more than the total loan amount. Most lenders cap the loan at 80% of the completed property value, though some will extend to 90% or 95% with lenders mortgage insurance.
You'll need to demonstrate you can cover interest payments that increase with each drawdown, plus retain enough buffer for cost overruns. Lenders typically add a 10% contingency to the contract price when calculating your borrowing capacity. Your broker can access construction loan options from banks and lenders across Australia to find a product that aligns with both your deposit size and the build timeline.
Fixed Price Contracts and Cost Plus Arrangements
A fixed price building contract locks in the total construction cost before work begins, which gives lenders certainty and simplifies the approval process. The contract lists every inclusion from frame to fixtures, and the builder absorbs cost variations unless you request changes through a written variation.
Cost plus contracts are less common for knockdown rebuilds purchased by owner-occupiers, though some custom builders work this way. Under cost plus, you pay the builder's actual costs plus an agreed margin, which means the final price can shift if material or labour costs change. Lenders treat these applications more conservatively because the loan amount isn't locked, and many require larger deposits or lower loan-to-value ratios.
How Progress Payments Release Throughout the Build
Construction funding releases according to a progress payment schedule tied to specific milestones. The builder invoices the lender after completing each stage, a quantity surveyor or building inspector confirms the work is complete, and the lender releases funds directly to the builder. The typical schedule includes base stage (slab or stumps), frame stage, lock-up stage, fixing stage, and practical completion.
You'll see a progressive drawing fee charged each time funds release, usually between $200 and $400 per drawdown depending on the lender. Some lenders cap this at five or six drawdowns regardless of how the builder structures progress payments. Interest compounds on the drawn balance, so if $150,000 has been released by lock-up stage, you're paying interest only on that $150,000 until the next drawdown occurs.
Interest Rate Structure During Construction
Most construction loans charge a variable interest rate during the building phase, then allow you to fix part or all of the loan once construction is complete. The variable rate during construction is often slightly higher than standard variable home loan rates, reflecting the additional administration and risk lenders carry during the build period.
Interest-only repayment options apply throughout construction, which keeps your monthly commitment lower while you're potentially still paying rent or living elsewhere. Once the loan converts to principal and interest after practical completion, repayments increase to include both the interest component and repayment of the borrowed amount over the remaining loan term.
Council Approval and Timing Conditions in Blackburn
Whitehorse City Council processes most standard knockdown rebuild applications within 60 to 90 days, though that extends if the design includes variations to standard ResCode provisions or if neighbours lodge objections. Lenders require unconditional council approval before they'll issue final loan approval, and most building contracts include a sunset clause requiring you to commence building within a set period from the disclosure date.
If council approval is delayed beyond the timeframe allowed in your finance pre-approval, you may need to request an extension from the lender or resubmit your application if interest rates or your financial circumstances have changed. Timing becomes particularly relevant in areas like Blackburn where lot sizes are often smaller and new builds can trigger overlooking or overshadowing concerns from neighbouring properties.
Deposit Requirements and Upfront Costs
You'll need a deposit that covers the land purchase plus enough buffer to reach the first progress payment. Lenders calculate the loan amount against the completed property value, but they won't release 100% of that amount upfront. If the land component is $600,000 and the build is $400,000, a lender offering 90% will approve a $900,000 loan. You'll need $100,000 deposit plus settlement costs, which include stamp duty on the land value, conveyancing, building insurance, and lender fees.
Stamp duty applies only to the land value, not the construction cost, which makes knockdown rebuilds more appealing than purchasing an equivalent completed property in the same area. A completed home worth $1,000,000 attracts stamp duty on the full amount, while a knockdown rebuild with the same end value only attracts duty on the $600,000 land component.
When the Loan Converts to Principal and Interest
The construction loan converts to a standard home loan once the builder reaches practical completion and you receive the occupancy permit. At that point, the lender conducts a final valuation to confirm the property is worth at least the amount you've borrowed, then moves the loan from construction to the ongoing mortgage product you selected at application.
Your repayments shift from interest-only on a variable balance to principal and interest on the full loan amount. This is when most borrowers choose to fix part of the loan if interest rates have moved or if they want repayment certainty. If you've been living elsewhere during construction, moving in at practical completion means you no longer have dual housing costs, which offsets the increase in repayments.
Why a Broker Adds Value to Construction Loan Applications
Construction loans involve more moving parts than standard home loans, and lender policies vary significantly on contract types, builder accreditation, progress payment structures, and drawdown fees. A mortgage broker compares these details across multiple lenders to find a construction loan that aligns with your builder's payment schedule and your cash flow.
Brokers also coordinate timing between the lender, solicitor, and builder to confirm the building contract is approved before settlement occurs on the land. If you're considering a refinance of an existing property to fund the knockdown rebuild, or if you're planning to retain your current home as an investment property while building the new one, the structure becomes more complex and broker involvement becomes particularly useful.
Call one of our team or book an appointment at a time that works for you to discuss your knockdown rebuild plans and confirm which lenders will support the contract structure your builder is proposing.
Frequently Asked Questions
Do I pay interest on the full loan amount during construction?
No, lenders only charge interest on the amount drawn down at each progress payment stage. Your repayments increase as more funds release to the builder throughout the build.
Can I use a cost plus contract for a knockdown rebuild purchase?
Some lenders accept cost plus contracts, but most prefer fixed price building contracts because they provide certainty on the final loan amount. Cost plus arrangements usually require larger deposits or lower loan-to-value ratios.
What happens if council approval is delayed in Blackburn?
If approval extends beyond your lender's pre-approval period, you may need to request an extension or resubmit your application. Most lenders require unconditional council approval before issuing final loan approval.
When does the construction loan convert to a standard home loan?
The loan converts once the builder reaches practical completion and you receive the occupancy permit. At that point, repayments shift from interest-only to principal and interest on the full loan amount.
Do I pay stamp duty on the full value of a knockdown rebuild?
No, stamp duty applies only to the land value, not the construction cost. This makes knockdown rebuilds more cost-effective than purchasing an equivalent completed property.
