Construction Loans Melbourne (2025): Rates, Steps, and Costs

Melbourne’s building scene is buzzing, and the dream of a custom home is back on a lot of shortlists. If you want a place that fits your block, your family, and your style, buying an existing house can feel like a compromise. That is where construction loans come in.

A construction loan funds your build in stages, called progress payments, not in one big lump sum. You only pay interest on the funds you have drawn, which helps with cash flow while you pay rent or a current mortgage. The lender checks each stage, then releases the next payment when the builder hits a milestone.

October 2025 brings a few realities to plan for. Construction costs are still edging higher, trades are tight, and timelines can stretch. Lenders are also looking harder at valuations, builder contracts, and your buffer. Getting the right loan structure can offset some of that pressure.

In this guide, you will see how construction loans in Melbourne work, what banks look for, and how to compare fixed and variable options. You will learn how drawdowns, LVR, and interest-only periods affect your budget. You will also get practical tips on deposits, contingencies, and avoiding common delays.

With a solid loan and a clear plan, you can keep your build on track and protect your cash. Ready to turn plans into a slab, frames, and a handover date? Let’s set up the finance so your builder can keep moving and you can keep costs in check.

What Are Construction Loans in Melbourne and How Do They Work?

A construction loan is short-term finance for a new build or major renovation, paid out in stages as the work progresses. You usually make interest-only payments during construction, then switch to principal and interest once the home is finished. Lenders require an approved builder, a fixed-price contract, and council-approved plans. Melbourne builds also factor in planning permits, overlays, soil reports, and local codes, which can affect costs and timing. For a quick explainer on staged funding, see NAB’s guide to progressive drawdowns: How do construction or owner builder loans work?

Key Differences from Traditional Mortgages

Traditional home loans pay a lump sum at settlement. With construction finance, the bank releases progress payments at milestones such as slab, frame, lock-up, fix, and completion. You only pay interest on the funds drawn, which helps cash flow while you rent or hold another mortgage.

• Staged draws: Funds are released as each stage is signed off. A valuer checks the work and confirms the build is on track before the next payment.
• Interest-only during build: Keeps repayments lower until handover.
• Suited to custom designs: You can adjust allowances and variations as needed, within lender limits and your contingency.
• Risk control: Valuations and builder checks reduce blowouts, which is handy in a tight Melbourne market with rising material costs.

For another overview of how stages work with licensed builders, see Bendigo Bank’s guide: A guide to construction loans

Typical Costs and Interest Rates in 2025

Expect these common costs in Melbourne this year:

• Application fee: $0 to $600, varies by lender.
• Valuation fees: $300 to $800 across multiple stages.
• Progress payment fees: Some lenders charge per draw.
• Rate range: Variable rates are often around 6 to 7 percent during construction, then align with your chosen home loan product after completion.
• Other setup costs: LMI if your LVR is high, plus legal and settlement fees.

First-time builders may access state grants or stamp duty savings on new builds, which can help with the deposit and finish upgrades.

Quick tips to shop smarter:

1. Compare the full package, not just the headline rate. Add fees and valuation costs.
2. Ask how many free valuations are included and what each extra draw costs.
3. Check the switch terms from interest-only to principal and interest.
4. Lock in a contingency of 10 to 15 percent for Melbourne-specific site surprises.