Buying guide

How does finance work when building a new home

Finance when building a new home can be complex - here’s everything you need to know.

Last updated: 12 February 2024

Building your dream home isn’t all happy families and double glazing. The process can come with a few unique challenges, from cost blow outs, to wrangling tradies and sorting finance.

To help make your build as stress free and easy as possible, we’ve answered all your questions about finance when building a new home.

How do construction loans work?

When building a new home, finance works a little differently to your average home loan. Here’s what you can expect:

  • If you need a loan to buy land this will typically be separate to the construction loan.
  • When you’re ready, you’ll agree on the total construction costs with your bank and builder. At this stage, you’ll generally need detailed building plans and a schedule of construction costs to show your bank.
  • Then, rather than borrowing one lump sum of money you’ll borrow in chunks to pay builders and suppliers as the construction progresses. This is called a ‘progressive drawdown’.
  • You can usually stick to interest-only repayments during construction to keep costs down. This will generally be on a floating interest rate, which can then be fixed once construction is complete.

While construction loans work differently, there are a few things that are the same as a regular home loan. The bank will still need to assess your income and financial situation to ensure that you’re able to afford repayments. This can be a difficult hurdle to clear, especially if you’re still paying a mortgage on your current home during the build, so you’ll need steady employment and a solid income.

If you need help applying for a construction loan and shopping for the best deal, it’s a great idea to speak to a mortgage broker who specialises in building finance.

Finance for new builds works a little differently than your average home loan.

Managing costs during a new build

Building is all about controlling hundreds of variables to achieve the outcome you want - a beautiful new home.

Because there are so many variables and moving parts, and because construction materials tend to increase in price, it can be extremely difficult to avoid cost overruns during your build. To ensure you can cope with cost overruns it’s best to have a contingency fund of at least 15% of the build cost put aside, just in case.

It’s also worth checking and double checking the building contract before you get started to ensure you understand it - and having a lawyer review it as well. A good lawyer will be able to explain the contract to you, identify clauses that may not be in your favour and recommend changes. It’s particularly important to understand any clauses that cover price fluctuations.

It’s also important to get a clear idea of the construction timeline from your builder, as during this time you may be paying two mortgages. Unfortunately, it’s extremely common for construction to take longer than expected, so make sure you have the time and the funds to cope with an extra six months of building at least.

Choosing your builder

Whether your home build goes smoothly or not will depend largely on the builder that you choose, so take your time to ensure you pick well. Here are a few things to look out for:

  • Experience building similar homes.
  • Registered master builder.
  • Track record of successful completed projects (that you can view).
  • Testimonials from past clients.
  • The builder has the capacity to handle your project.
  • Positive online reviews and a business website.

As well as choosing a good builder, you’ll want to arrange contract works insurance before a single peg goes into the ground. This will cover you in case something goes wrong with the build.

There’s no point in sugarcoating it. Building can be expensive, time consuming and stressful - but the value of owning a home that’s tailored to suit you and your family is huge. Take your time, surround yourself with professionals that you trust and make sure your finances are in order and you can make it happen.

*We hope this article has provided some helpful information. It's based on our experience and is not intended as a complete guide. Of course, it doesn’t consider your individual needs or situation. If you're thinking about buying or selling a property, you should always get specific advice.


Ben Tutty
Ben Tutty

Ben Tutty is a regular contributor for Trade Me and he's also contributed to Stuff and the Informed Investor. He's got 10+ years experience as both a journalist and website copywriter, specialising in real estate, finance and tourism. Ben lives in Wānaka with his partner and his best mate (Finnegan the whippet).