Smart ways to approach knockdown rebuild finance

A knockdown rebuild requires different finance to a standard purchase because you're funding two separate transactions: acquiring the property and constructing a new dwelling.

Most lenders structure this as a two-stage approval. The initial loan funds the land purchase at standard residential rates, then converts to a construction facility once demolition and council approval are complete. During the build phase, funds release progressively against verified stages rather than as a lump sum, and you only pay interest on amounts drawn down. Once construction finishes and practical completion is certified, the loan reverts to principal and interest repayments on the full amount.

How the two-stage approval process works

You submit a single application covering both the purchase and the proposed construction. The lender assesses your borrowing capacity against the total project cost, including land, demolition, build, and associated fees. Approval is conditional on you providing a fixed price building contract, council-approved plans, and evidence the registered builder holds appropriate insurance.

Consider a commercial lawyer purchasing a dated home in an established suburb for demolition. The property costs $950,000. The build contract is $780,000. Demolition, design, and council fees add $65,000. Total project cost is $1,795,000. The lender approves the full amount upfront but releases funds in two distinct phases. The first drawdown of $950,000 settles the land purchase. The remaining $845,000 releases progressively during construction according to the agreed schedule.

What happens between land settlement and construction commencement

Once you settle on the land, the loan operates as a standard variable or fixed rate mortgage on the purchase amount. You make principal and interest repayments on that portion while you finalise demolition, obtain final council sign-off, and lock in the building contract. Most lenders require construction to commence within six to twelve months from land settlement. If you exceed that window without starting, the construction approval may lapse and require resubmission.

During this period, you're also coordinating the development application if it wasn't already approved, engaging the builder, and arranging insurances. The lender will want to see the fixed price building contract and stamped council plans before authorising the first construction drawdown. Some lenders charge a establishment fee for the construction facility at this point, separate from the initial loan establishment fee paid at land settlement.

How the progressive drawdown schedule aligns with building stages

Construction loans release funds at predetermined milestones, typically slab down, frame up, lock-up, fixing stage, and practical completion. Each stage represents roughly 20% of the build cost, though the exact split depends on your contract. The builder invoices you when each stage completes. You submit that invoice to the lender along with a progress inspection report from an independent valuer or building inspector the lender engages. Once satisfied the work matches the stage claimed, the lender releases that portion of the approved construction funding directly to the builder or into your account, depending on the contract structure.

You pay interest only on the cumulative amount drawn down. If $500,000 has been released across the first three stages, your interest charges apply to that amount, not the full construction approval. As each additional stage draws down, your interest cost increases proportionally. The construction loans for lawyers structure is designed to match funding to actual expenditure rather than loading you with interest on money sitting unused.

Lenders typically charge a progressive drawing fee each time funds release, usually between $150 and $400 per drawdown. Over five stages, that adds $750 to $2,000 to your project cost. Factor that into your budget alongside the valuation or inspection fees the lender charges at each stage.

Interest rate and repayment structure during construction

Most construction loans operate on a variable rate during the build phase with interest-only repayments. Some lenders offer a fixed rate option for the construction period, but the rate is usually higher than their standard fixed home loan product due to the progressive funding structure. Variable rates during construction typically sit within the lender's standard owner-occupied or investment range, depending on your intended use of the completed property.

Interest accrues daily on the drawn balance and is payable monthly. If your drawn balance is $600,000 and the variable rate is 6.2% per annum, your monthly interest cost is approximately $3,100. As the next stage draws down and your balance increases to $750,000, the monthly interest rises to around $3,875. You're not required to make principal repayments during construction, which keeps your monthly outgoings lower while you may still be paying rent or holding another property.

Once the builder issues practical completion and the final drawdown releases, the loan converts to a standard principal and interest home loan refinancing for lawyers or investment loan structure. The lender revalues the property based on the completed dwelling, and your repayments adjust to reflect the full loan amount over the remaining term.

Cost plus contracts versus fixed price building contracts

Lenders strongly prefer fixed price building contracts for knockdown rebuild finance. A fixed price contract specifies the total build cost upfront, with variations processed separately and documented. This gives the lender certainty that the approved funding will complete the project. Most mainstream lenders will not approve construction finance against a cost plus contract, where the builder charges for labour and materials as they're incurred without a capped total.

If you're acting as an owner builder, borrowing options narrow significantly. Many lenders exclude owner builders entirely. Those that do lend typically require you to demonstrate relevant building qualifications, hold owner builder insurance, and may lend a lower percentage of the project cost. The additional risk to the lender comes from the absence of a registered builder's warranty and the higher likelihood of cost blowouts or incomplete work.

For commercial lawyers managing demanding workloads, engaging a registered builder under a fixed price contract is the most reliable path to both securing finance and completing the project within a defined timeframe. You can review the contract before signing, but once construction starts, your involvement is limited to approving variations and attending progress meetings.

What happens if construction costs exceed the original approval

Variations to the building contract require lender approval if they increase the total project cost beyond the original loan amount. If your builder identifies an additional $30,000 in structural work not covered in the original scope, you'll need to either fund that variation from your own resources or apply for a loan top-up. The lender will reassess your borrowing capacity and may require updated valuations or documentation before approving the additional funds.

Cost overruns that push the total project value above the approved amount without the lender's agreement can delay drawdowns or stall construction. Builders typically won't proceed to the next stage without payment for completed work, and lenders won't release funds beyond the agreed schedule without approved variations. This is why a detailed fixed price contract with a realistic contingency allowance reduces the likelihood of mid-project funding issues.

If you're considering a knockdown rebuild and want to understand how the finance structure applies to your situation, call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions