If you’re building your first home, researching home-building options, or even just considering building rather than buying an existing home, you’ve probably come across the term ‘construction loan’. But what exactly does that mean? How does this type of finance work, and do construction loans have higher interest rates?
A construction loan is a type of home loan designed for people who are building a new property rather than buying an existing home. Instead of receiving the full loan amount upfront, the funds are released in stages as the build progresses. That means your repayments start small and increase over time.
One of the most common questions first-home buyers ask is: “Are construction loan interest rates higher?” In this article, we explain how construction loan interest rates work, why they matter and how you can get a better deal to build your home.
What is a construction loan? (And why does the interest rate matter?)
A construction loan is a type of home loan designed specifically for building a new home. Unlike a regular home loan that gives you all the money upfront to buy a property, a construction loan releases funds in stages as your home is being built. These are called ‘progress payments’.
The interest rate for home construction loans matters because you’re only paying interest on the funds you’ve used so far. That means your repayments start low and increase as your build progresses. But it’s important to know that most construction loans come with variable interest rates, which means your repayments can go up (or down) based on market conditions.
If you’re still paying rent during this time, even small rate changes can affect your budget. That’s why it’s important to understand how these loans work from the start.
How construction loan interest rates compare to standard home loans
Generally, home construction loan interest rates are the same as those for a standard home loan.
Here’s a quick side-by-side comparison of the two loan types:
| Feature | Construction loan | Standard home loan |
| Interest type | Usually variable | Variable or fixed |
| Repayments | Interest-only during the build | Principal + interest or interest-only |
| Funds | Released in stages | Full amount released upfront |
| Interest rate | May be slightly higher | May be lower |
The great news about construction loans is that the repayments are interest-only during the build, which helps keep your costs down while your home is being constructed. And because construction loan interest rates are generally the same as standard home loans, you’re not paying extra for this flexibility.
Once construction is complete and your home is ready to move into, your construction loan usually converts to a regular home loan, with principal plus interest repayments.
Tip to keep in mind: a higher interest rate is usually temporary as it’s just in place for the build period.
How to find the best construction loan interest rates
It helps to understand the average construction loan interest rate so you can compare offers confidently. Here’s the good news: you can shop around, and there are ways to get a better deal.
Here are some pointers to get you started:
- Compare lenders: Not all lenders offer the same construction loan products. Look at rates, fees and flexibility. Comparing current construction loan interest rates is a smart first step.
- Use a finance expert: Easystart’s in-house Westgate Finance team can compare loan options, saving you time and helping you secure a competitive rate. They can also give you lots of advice on financing options, how to take advantage of government incentives and answer your questions about the cost of building.
- Boost your credit profile: A better credit score, lower debts, and a decent deposit can all help you get a better rate. So, pay off your credit card and personal loans before applying.
- Bundle your house, land and finance: Doing it all through one team (like Easystart) can streamline your home-building experience, reduce stress and even give you more negotiating power with lenders.
The bottom line on construction loan interest rates
Yes, construction loan interest rates can be a little higher than standard home loan rates, but that doesn’t mean they’re a bad deal. The real value is in what you’re building: your brand-new home.
When you work with Easystart, you get house, land and finance advice all in one place, plus expert support every step of the way. We’ll help you understand your borrowing power, compare loan options and make confident decisions about financing your new build.
Let’s make your first home easy. Chat with our team and get started today!
