The Easiest Way to Finance an Investment Build

A construction loan for an investment property releases funds in stages as your build progresses, with interest charged only on the amount drawn down at each stage.

This structure means you're not paying interest on the full loan amount from day one, which can make a meaningful difference to your cash flow during the build. Once construction finishes, the loan converts to a standard investment loan with ongoing repayments. The process involves more documentation and coordination than a standard purchase, but it's designed to align with how builders actually get paid.

For Bentleigh East investors, this loan type often comes into play when buying a block in the suburb's southern residential pockets or knocking down and rebuilding on an existing site. With median land values in the area sitting higher than many outer suburbs, the ability to control costs through a fixed price building contract becomes particularly relevant.

How Construction Draw Schedules Actually Work

A construction draw schedule breaks your loan into five or six progress payments that release as specific milestones are completed. Typical stages include base, frame, lock-up, fixing, practical completion, and final inspection. Your lender arranges a progress inspection before releasing each payment, and you'll pay a progressive drawing fee each time, usually between $300 and $500.

Consider an investor building a dual-occupancy development in Bentleigh East. The land component settles first using the initial drawdown. When the builder completes the slab, the second payment releases directly to the builder's account. At frame stage, another inspection occurs and the third payment flows through. This continues until practical completion, at which point the loan converts to principal and interest or interest-only repayment options depending on your investment strategy.

Between each drawdown, you're only paying interest on what's been released. If your total facility is $800,000 and you've drawn $320,000 by lock-up stage, your interest cost is calculated on that lower amount, not the full loan amount. Once the build completes and tenants move in, rental income starts covering the converted loan repayments.

What Lenders Require Before Approving Construction Funding

Lenders want a fixed price building contract with a registered builder, council approval in place, and evidence that construction will commence within a set period from the disclosure date. You'll also need a detailed cost breakdown showing land price, building cost, and associated fees like stamp duty and legal costs.

For investment builds specifically, lenders assess the project based on the end valuation, not just the construction cost. If you're spending $750,000 on land and build combined, but the completed property values at $820,000, that additional equity strengthens your application. This calculation matters more in established areas like Bentleigh East, where land values hold firm and completed properties typically appraise close to or above construction cost.

Your borrowing capacity gets assessed differently during construction compared to a standard purchase. Lenders factor in the future rental income once the build completes, but during the construction phase they're primarily concerned with your ability to service interest-only payments from your existing income.

Why Interest-Only Repayments Suit Most Construction Investors

Interest-only repayment options during construction mean you're not making principal repayments on a property that isn't generating income yet. This keeps your holding costs lower while the build progresses and before tenants take occupancy.

Once construction finishes and the property settles with tenants, you can choose to stay on interest-only or switch to principal and interest. Many investors hold interest-only for the first few years to maximise cash flow and tax deductions, particularly when managing multiple properties. The interest you pay during construction and once tenants are in place is generally tax-deductible because the property's purpose is to produce assessable income.

In our experience, investors building in Bentleigh East often choose interest-only for the full construction period and then for another one to five years post-completion, depending on their broader portfolio strategy and whether they're planning further acquisitions.

The Role of Cost Plus Contracts Versus Fixed Price Contracts

A fixed price building contract locks in your construction cost, which makes lender approval more straightforward and protects you from cost blowouts. A cost plus contract charges for actual costs plus a builder's margin, which offers flexibility but introduces uncertainty that most lenders won't accept for standard construction finance.

For investment purposes, fixed price contracts are almost always required. Lenders need certainty around the final loan amount, and a cost plus arrangement doesn't provide that. The contract should clearly outline the progress payment schedule, including exactly what triggers each payment and what happens if there are delays.

As an example, an investor knocking down a post-war weatherboard in Bentleigh East to build two townhouses would typically engage a builder offering a fixed price contract, with stage payments tied to slab, frame, lock-up, fixing, and practical completion. That structure aligns with how construction loans are drawn and keeps the project moving without payment disputes.

Council Approval and Development Application Timing

You need council approval before most lenders will issue formal loan approval, though some will provide conditional approval while the development application is still being assessed. In Bayside and Glen Eira council areas, which cover Bentleigh East, approval timeframes vary depending on whether your project requires a planning permit or falls under code-assessed development.

Single dwellings on standard blocks often don't need a full planning permit, but dual-occupancy or multi-unit projects typically do. If you're building an investment property that involves subdivision, expect the council process to take several months. Your builder and any relevant consultants like plumbers and electricians will need signed-off council plans before commencing work, and your lender will ask to sight these documents during the loan application.

Projects near Bentleigh East's Centre Road retail strip or within heritage overlay zones may face additional scrutiny, so factor that into your timeline when coordinating finance approval with your construction start date.

Switching from Construction Finance to a Standard Investment Loan

Once your build reaches practical completion and you've drawn the final payment, your construction loan automatically converts to a construction to permanent loan. This means it becomes a standard mortgage with regular repayments, either principal and interest or interest-only depending on what you arranged upfront.

At this point, your property is valued as a completed asset, not as a construction project. If the end valuation comes in higher than your total loan amount, you've created equity. Some investors use that equity to fund their next project, while others hold it as a buffer or to cover future renovations.

The interest rate during construction is often slightly higher than standard variable rates, but once the loan converts, you'll typically move onto a standard investment loan interest rate. It's worth discussing your post-construction loan structure during the initial application so there are no surprises when the build finishes and tenants are ready to move in.

What Happens with Owner Builder Finance

Owner builder finance is available, but fewer lenders offer it and the criteria are stricter. You'll generally need demonstrated building experience, appropriate insurance, and a detailed project plan. For most investors, engaging a registered builder under a fixed price contract is the more viable path, particularly if you're managing the investment remotely or alongside other work commitments.

If you're considering an owner builder approach for a Bentleigh East investment, expect lenders to require evidence of your qualifications, proof that relevant trades like plumbers and electricians are licensed and insured, and a line-by-line cost breakdown. The progressive drawdown works similarly, but lenders may hold back a larger portion until final completion to manage their risk.

For investors without construction backgrounds, the time and compliance burden of owner builder projects often outweighs the cost saving, especially when factoring in the narrower range of lenders willing to provide finance.

When to Start the Construction Loan Application

Start your application once you have a signed fixed price building contract and council approval is either granted or imminent. Lenders can't provide formal approval without these documents, and applying too early just means resubmitting updated paperwork later.

If you're buying land and building in one transaction, coordinate your land settlement with your construction finance so the first drawdown aligns with the land purchase. If you already own the land, your lender will use its current value as part of your total security, which can increase your borrowing capacity or reduce the deposit required for the build component.

For investors working in Bentleigh East's established residential zones, timing also depends on whether you're coordinating demolition, services connection, or site preparation before construction begins. Make sure your finance approval period allows enough time for these preliminary steps without rushing the builder or triggering sunset clauses in your contract.

Call one of our team or book an appointment at a time that works for you.

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