Avoid These 5 Mistakes When Financing Your Investment Build

Construction finance for an investment property is more involved than a standard home loan.

Lenders assess your borrowing capacity differently, require additional documentation during each stage, and often charge higher interest during the build phase. If you're planning to build an investment property in Point Cook, understanding how the progressive drawdown works and what lenders expect at each stage will keep your project on schedule and within budget.

Lenders Treat Investment Construction Differently to Owner-Occupied Builds

Lenders assess investment construction loans with stricter serviceability tests and lower loan-to-value ratios than they apply to owner-occupied builds. You'll typically need a larger deposit, often 20% or more, and your rental income projection won't be factored in until the property is complete and tenanted. During the construction phase, you're covering both your existing accommodation costs and the interest-only payments on the drawn-down loan amount, which tightens your serviceability.

Consider a buyer purchasing land in Point Cook's Saltwater Coast precinct with plans to build a four-bedroom townhouse as an investment. They secure a land and construction package, but when they apply for finance, the lender only services the loan based on their current income and existing rent payments, not the future rental return. The buyer needed to demonstrate they could service both their current rent and the construction loan interest simultaneously, which meant reducing the loan amount and increasing their deposit from 10% to 25%.

The Progressive Drawdown Schedule Determines When You Pay Interest

Construction finance is released in stages as the build progresses, and you only pay interest on the amount drawn down so far. A typical progress payment schedule includes five or six stages: base stage, frame stage, lockup stage, fixing stage, and practical completion. Each drawdown is triggered by a progress inspection conducted by the lender's valuer, who confirms the work has reached the agreed milestone before releasing the next payment to your builder.

You'll also encounter a Progressive Drawing Fee each time the lender releases funds, usually between $300 and $500 per drawdown. Over five or six stages, these fees add up to around $2,000 to $3,000, which should be factored into your overall budget. During construction, your repayments are interest-only on the drawn-down amount, which keeps costs lower while the property isn't generating income. Once the build is complete and you transition to the permanent loan, you can choose to remain on interest-only repayments for the investment property or switch to principal and interest.

Fixed Price Building Contracts Protect You From Cost Blowouts

A fixed price building contract locks in the construction cost before you apply for finance, which gives lenders confidence and protects you from unexpected price increases during the build. Most lenders will only approve construction finance where a registered builder has signed a fixed price contract, as cost plus contracts introduce too much uncertainty around the final loan amount. The contract should clearly outline the progress payment schedule, including the percentage of the total build cost payable at each stage.

If your builder operates on a cost plus contract, where you pay for materials and labour as they're incurred, you'll find fewer lenders willing to provide finance. In that scenario, you may need to provide a larger deposit or accept a higher interest rate to offset the lender's additional risk. For investment builds, where lenders are already applying tighter criteria, a fixed price contract is often non-negotiable.

Council Approval Must Be Finalised Before Settlement on the Land

Your development application and council approval need to be locked in before you settle on the land, particularly if you're buying land and building in Point Cook's newer estates. Lenders require proof that your building plans comply with local council requirements and that all permits are in place before they'll release construction funds. If you settle on the land without council approval, you'll be paying interest on the land component of the loan while waiting for permits, which can stretch for months.

Most lenders also require you to commence building within a set period from the Disclosure Date, often six to twelve months. If your council approval is delayed and you can't start on time, the lender may withdraw the construction facility or require you to reapply, which means going through serviceability checks again under potentially different criteria. Working with a mortgage broker in Point Cook, VIC who understands local council timelines can help you sequence your land purchase and approvals correctly.

Rental Income Won't Be Counted Until the Property Is Tenanted

Even though you're building an investment property, lenders won't factor in projected rental income when assessing your construction loan application. Serviceability is based entirely on your current income and existing commitments, which means you need to demonstrate you can afford the construction loan interest without relying on future rent. This is a common point where buyers miscalculate their borrowing capacity, particularly if they're already servicing other investment loans or have limited surplus income.

Once construction is complete and you've secured a tenant, you can request the lender reassess your serviceability to include the rental income. If you're planning to build multiple investment properties, this sequencing matters. You may need to wait until the first property is tenanted and contributing rental income before you can borrow again for the next build, rather than overlapping projects.

Construction Loan Interest Rates Are Usually Higher During the Build

During the construction phase, lenders typically charge a higher interest rate than they would for a standard investment loan, often 0.5% to 1% above the equivalent variable rate. This reflects the additional risk and administration involved in releasing funds progressively and conducting inspections. Once construction is complete and you transition to the permanent loan, the rate drops to the standard investment property rate.

Some lenders offer a construction to permanent loan structure, where the construction facility automatically converts to a standard loan once the build is finished. Others require you to reapply or refinance at completion, which introduces the risk of rate changes or serviceability issues if your circumstances have shifted. Confirming the transition process upfront and locking in the post-construction rate structure where possible will give you certainty around your long-term holding costs.

If you're planning to build an investment property in Point Cook and want to understand your borrowing capacity, construction loan options, and how the drawdown process will work for your specific project, call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions