How to Spot and Manage Construction Loan Risks in Perth

Building a home is exciting, and it is also a long project with a lot of moving parts. The biggest construction loan risks come from cost blowouts, delays and paying for work that has not been done yet. Each one can be managed if you plan for it before you sign anything.

What Are the Main Risks of a Construction Loan?

The main risks are going over budget, build delays, builder problems and repayments that start before you move in. Each one can put pressure on your cash flow while you are still paying rent or a mortgage elsewhere.

A construction loan is not paid out in one lump sum. Your lender releases money in stages as the build moves along. That is helpful, but it also means a problem at any stage can hold up the next payment. If you are building your first home, our first home buyers page explains how building fits into that journey.

How Do Progress Payments Work in WA?

In Western Australia, progress payments must be genuine payments for work already done or materials already supplied. The builder also has to take out home indemnity insurance and give you the certificate before asking for any payment.

The Home Building Contracts Act 1991 (WA) also limits the deposit to 6.5 per cent for contracts valued from $7,500 to $500,000. A small exception allows up to 20 per cent where off-site cabinetry makes up more than half of the contract value. The Act does not set fixed stages, so your contract and your lender's rules decide the schedule.

Your lender sets its own rules on top of this, including how many drawdowns you get, what inspections are needed and what fees apply. These vary between lenders, so ask early. You can read more on our construction loans page.

Why Does Interest Start Before the House Is Finished?

Interest is charged on the amount drawn so far, so your repayments grow as each stage is paid. Some lenders may allow interest-only repayments during the build; check your lender's terms.

NSW Government guidance says a borrower financing a project home starts repayments once the first progress payment is made. Check your own lender's terms for how this works in WA.

The trade-off with interest-only repayments is that you are not paying down the loan itself during that time. Your balance grows as each stage is drawn, and it does not fall until principal and interest repayments start. If your total loan term is fixed, repayments after the build are worked out over a shorter remaining term and may be higher. Ask your lender how the term is set when the loan converts.

As an illustration only, using an example rate of 6.75% p.a., a loan with $400,000 drawn would cost about $2,250 a month in interest only. That is $400,000 x 6.75% / 12. As more is drawn, the interest rises with it. Our mortgage repayment calculator lets you test your own numbers.

Can You Still Pass the Lender's Test While Building?

Yes, but your lender will still check that you can afford the repayments, even though some lending limits do not apply to new builds. APRA's debt-to-income limit exempts finance for the construction of new dwellings, but that does not remove the serviceability assessment.

Under APRA's rules, banks must test your ability to repay at a rate at least 3 percentage points above the loan rate. APRA confirmed in May that this buffer stays in place. Non-bank lenders are not covered by APRA's rules, so their approach can differ.

It is worth knowing your limit before you pick a block or a builder. Our borrowing capacity page is a good place to start.

What Happens If the Build Runs Over Budget?

If costs rise beyond your loan amount, you have to fund the gap yourself or ask your lender for more, and the lender may say no. The loan limit is set at the start, so the buffer needs to be planned in advance.

Consider a couple in Perth building a family home on a loan with a fixed price building contract. Partway through, they choose to upgrade the kitchen and add a patio. Neither was in the original contract, so the builder charges for both as variations. The couple had not set aside any extra cash, and the lender would not lift the loan limit without a new valuation and assessment.

They paid for the changes from savings and paused one upgrade until after handover. The build finished on schedule, but it left them with little cash for moving costs. If they had kept a buffer from day one, the choice would have been easier.

A useful rule is to ask your builder what is and is not included before you sign. A broker can then match your loan to your contract type so there are fewer surprises.

Why Do Delays and Builder Problems Matter So Much?

Delays matter because you keep paying rent or an existing mortgage while interest on the construction loan builds up. A builder who stops work or becomes insolvent can leave the build half finished.

Some lenders set a time limit for the build, so a long delay can create problems with your loan. Ask your lender what happens if the build runs late.

In WA, home indemnity insurance is meant to protect you if your builder cannot finish the work. Our insurance page covers other cover you may want in place. It is also worth checking your builder's registration before you sign.

Does Your Loan Still Suit You After the Build?

Once the build is complete, most construction loans convert to a standard home loan, usually with principal and interest repayments, but this depends on your lender and loan. Check what your lender does at completion. The rate and features may no longer suit you, so this is a good time to review it.

A review after handover can show whether a change makes sense, though refinancing can come with fees and other costs. Our refinancing page explains how that works.

Building is a long-term commitment, and so is the relationship with your broker. We stay in touch well after settlement because your needs change as your home does.

If you are planning a build in Perth, call one of our team or book an appointment at a time that works for you. We will talk through your plans, your budget and the risks before you commit.

Frequently Asked Questions