What Not to Do When Financing a Renovation Project

A renovation project sits somewhere between buying a finished home and building from scratch.

You're purchasing a property that needs significant work before it becomes liveable or reaches its potential value. That might mean a cosmetic update or a full gut and rebuild. Either way, you need a loan structure that covers both the purchase and the construction phase without forcing you to refinance halfway through or pay interest on money you haven't spent yet.

Construction Loans Cover Both Purchase and Build Costs

A construction loan is designed to fund the purchase of land or an existing property, then release additional funds progressively as the building or renovation work is completed. You're not drawing down the full loan amount on day one. Instead, the lender releases funds in stages tied to a progress payment schedule, which means you only pay interest on what's been drawn.

Consider a buyer purchasing a post-war cottage for renovation. They might draw down the purchase price at settlement, then access the remaining loan amount in four or five instalments as the builder completes the foundation, frame, lock-up, fixing, and final stages. Each payment is triggered by a progress inspection, and the lender confirms the work has been done before releasing the next tranche.

This structure works for full demolitions, partial renovations, and extensions. The key difference from a standard home loan is that the funds are quarantined until construction milestones are met, and you're not charged interest on money still sitting with the lender.

Why a Standard Home Loan Doesn't Work for Renovation Projects

Most buyers assume they can purchase the property with a standard home loan, then fund the renovation separately. That approach creates two problems.

First, if you draw down the full loan amount at settlement, you're paying interest on the renovation component before any work has started. On a project requiring $150,000 in building costs, that could mean paying interest on funds you won't use for months.

Second, if you don't include the renovation costs in your initial loan, you'll need to either pay for the work out of savings or apply for a separate loan later. Most families don't have that kind of cash available, and applying for a second loan while already committed to a mortgage is harder than funding the whole project upfront.

Construction finance avoids both issues by structuring the loan so that only the purchase price is drawn at settlement, with the remaining funds released progressively as the builder invoices for completed work.

Fixed Price Building Contracts Are Usually Required

Lenders want certainty about how much the project will cost before they approve the loan. That means you'll usually need a fixed price building contract from a registered builder before submitting your construction loan application.

A fixed price contract sets out the total cost of the work, the progress payment schedule, and the timeframe for completion. The lender uses this document to determine how much they'll lend and when each drawdown will occur. Without it, most lenders won't proceed.

There are exceptions. Some lenders will consider cost plus contracts, where the builder charges for labour and materials with an agreed margin. But these are less common for renovation projects and usually require a higher deposit or more detailed documentation.

Owner builders face additional hurdles. Many lenders won't offer construction finance to owner builders at all, and those that do typically require a larger deposit and more detailed project plans, including council approval and a full breakdown of costs.

The Progressive Drawing Fee Adds to Your Upfront Costs

Every time the lender releases funds, they charge a fee to cover the progress inspection and administrative work. This is called a progressive drawing fee, and it's usually between $300 and $500 per drawdown.

On a renovation project with five progress payments, that's an additional $1,500 to $2,500 in costs that don't appear in the builder's quote. These fees are separate from your standard loan establishment costs and are charged each time you request a payment.

Some lenders cap the number of drawdowns or bundle inspections to reduce fees. Others allow you to capitalise the fees into the loan rather than paying them upfront. It's worth asking how many drawdowns are included and whether there's flexibility to reduce the number of payments if the builder is willing to invoice in larger increments.

You'll Need Council Approval Before the Lender Will Proceed

Before a lender will approve a construction loan for a renovation project, they'll want to see evidence that the work has been approved by the local council. That usually means a development application for major structural changes or a complying development certificate for smaller projects.

If the renovation involves moving walls, adding rooms, or changing the roofline, you'll need a DA. If it's a cosmetic update or internal reconfiguration that complies with standard codes, a CDC might be enough. Either way, the lender won't release funds until they've seen the paperwork.

This creates a timing issue. You can't apply for council approval until you own the property or have the owner's permission, but you need approval before the lender will settle. The way around this is to make your purchase contract conditional on obtaining council approval, or to start the DA process during the cooling-off period if the property is in New South Wales.

Interest-Only Repayments During Construction Keep Costs Down

Most construction loans include an interest-only repayment option during the building phase, which means you're only paying interest on the amount drawn down so far, not the full loan amount. Once the work is finished and the final drawdown is made, the loan converts to principal and interest repayments.

This structure reduces your monthly repayments during construction, when you might still be paying rent or managing other costs. Once the renovation is complete and you've moved in, the loan switches to a standard repayment schedule.

The interest-only period is usually capped at 12 or 24 months, depending on the lender and the expected timeframe for the project. If the build runs over, you'll need to request an extension or start making principal and interest repayments before the work is finished.

Builders Expect Payment Within Days of Each Milestone

Once the builder completes a stage and invoices you, they'll expect payment within a few days. The lender's progress inspection process can take longer than that, which creates a timing gap.

Most builders are used to this and will allow a short delay, but if the lender takes two weeks to inspect and approve the drawdown, the builder may stop work or charge interest on the outstanding amount. Some contracts include a clause that pauses construction if payment is delayed beyond a set period.

To avoid this, ask your lender how long the inspection process usually takes and whether you can book inspections in advance based on the builder's projected timeline. Some lenders allow you to submit drawdown requests before the work is fully complete, so the inspection happens as soon as the milestone is reached.

You'll Usually Need to Start Building Within Six Months of Settlement

Most construction loans require you to commence building within a set period from settlement, usually six months. If you haven't started by then, the lender may withdraw the construction funding or convert the loan to a standard home loan, which means you'll lose access to the progressive drawdown structure.

This timeline can be tight if you're waiting for council approval, finalising plans with an architect, or selecting a builder. The way around it is to have your building contract signed and council approval in hand before you settle on the purchase. That way, construction can start immediately.

If delays are unavoidable, some lenders will extend the commencement period, but you'll need to request this in writing and provide evidence of progress, such as updated council correspondence or a revised contract with the builder.

Renovation Finance Lets You Buy Properties Other Buyers Can't Touch

Most buyers won't consider a property that needs significant work because they don't understand how to fund it. That gives you access to homes that are priced below market value because the competition is limited.

A renovation project might be a deceased estate that hasn't been updated in decades, a property with structural issues that scare off owner-occupiers, or a home in a good location that's been neglected. If you can secure construction finance that covers both the purchase and the build, you're competing with investors and developers rather than families looking for a move-in-ready home.

The challenge is that the property needs to be liveable or have the potential to meet the lender's valuation once the work is complete. If the finished value doesn't support the total loan amount, the lender won't proceed. That's why you'll usually need a valuation report that estimates the property's value post-renovation, not just its current condition.

Call one of our team or book an appointment at a time that works for you to talk through how a construction loan could be structured for your renovation project and which lenders are willing to fund the type of work you're planning.

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