A construction loan is a stage-specific facility that funds the physical build of a property project once development approval has been granted, a fixed-price build contract is signed, and (in most major-bank cases) a minimum pre-sale coverage threshold is met.
The facility draws in tranches against a quantity surveyor's certified progress claims: slab pour, framing, lock-up, fixing, practical completion. The loan is sized against the contracted construction cost, typically capped at 65 to 80% of total project cost, and is repaid from the sale of completed lots or units, or refinanced into a stabilised investment facility once the build is complete.
Major banks generally require pre-sale coverage of 100% or more of the debt amount before a construction loan draws down. Private and tier-two lenders can write lower pre-sale thresholds, at a wider rate, reflecting the added risk of unsold stock at completion. Terms typically run 12 to 24 months, tied to practical completion, with interest usually capitalised into the facility balance rather than serviced monthly.
A construction loan is distinct from development finance, which covers the earlier stages of a project: land acquisition, the DA-hold period, and the lead-in to construction. The two are commonly used in sequence, development finance for the site and approval stage, then refinance into a construction loan once the DA is granted and pre-sales are in place.