What’s the Difference Between Construction Loans and Regular Home Loans?
If you’re building a new home, you’ve likely come across the term construction loan. But how does it differ from a standard home loan? While both types of loans help finance your property dreams, they work quite differently, and understanding those differences can help you better plan your budget and build a timeline.
What Is a Regular Home Loan?
A regular home loan (also called a mortgage) is what most buyers use when purchasing an established property. The loan is typically paid out in full at settlement, and you begin repaying the principal and interest immediately.
Key features of a regular home loan:
- Lump sum payment at settlement
- Repayments begin straight away
- Suitable for buying existing homes
- Fixed or variable interest rate options
These loans are straightforward because the property is already complete and ready to live in.
What Is a Construction Loan?
A construction loan is designed specifically for building a new home from the ground up. Unlike a standard mortgage, the funds are released in stages, known as progress payments, as construction progresses.
Typical progress payment stages include:
- Slab down
- Plate height
- Roof on / Enclosed
- Lock-up
- Fit-out / Practical Completion
With each stage completed, your builder (like Aveling Homes) will provide an invoice, which your lender pays directly from your loan account.
Benefits of a construction loan:
- You only pay interest on the funds drawn (not the full amount)
- Helps you manage cash flow during the build
- Often has flexible drawdown schedules aligned with your builder’s timeline
Differences Between the Two Loan Types
The key differences between a regular home loan and a construction loan come down to how the funds are released, when repayments begin, and the purpose of the loan itself. With a regular home loan, the full amount is paid out at settlement, and repayments start immediately, making it suitable for buying an established property. Construction loans, on the other hand, are specifically designed for building a home. Funds are released in stages as construction progresses, and you’ll typically only pay interest on the amount drawn down at each stage. Progress payments are made at key milestones like slab down, roof on, and practical completion. Because the home doesn’t yet exist, construction loans are seen as higher risk by lenders, which means more documentation and oversight are usually required.
How Aveling Homes Can Help
Building your dream home is exciting, and at Aveling Homes, we know how important it is to have the right finance in place. While we’re not a lender, we work closely with clients and their brokers to provide the documentation required at each stage of the construction loan process. From signing building contracts to progress payment claims, we’ll support you with clear timelines and communication so your finance can flow smoothly.
We also recommend speaking to a mortgage broker or lender early in the process so you’re ready to go when it’s time to sign.
Choosing the right loan depends on your situation. If you’re building new, a construction loan is usually the way to go, offering flexibility and staged payments that match your build progress. If you’re buying an established home, a standard home loan might be more suitable.
Either way, understanding the difference gives you greater control and confidence throughout your property journey.