A knockdown rebuild in Ulladulla lets you stay in the location you want while building the home you need, and the right construction loan structure makes it possible without selling first.
Most knockdown rebuild projects in Ulladulla involve homeowners who already own the land. You use your existing property as security, demolish the old house, and build new. The challenge is that standard home loans don't cover this process. You need construction finance that releases funds progressively as the build advances, and you need a lender who will accept your land as security even while it has no habitable dwelling on it.
Consider a homeowner in Ulladulla who owns a 1970s weatherboard on a 700-square-metre block near Warden Head Reserve. The house is tired, but the location is ideal. They want to knock it down and build a modern three-bedroom home with a fixed price building contract of $480,000. Their existing property is unencumbered. They apply for a construction loan using the land as security. The lender values the land at $420,000 and approves the loan based on the projected end value of the completed home, which is assessed at $850,000. The loan settles before demolition begins. Funds are held by the lender and released in stages as the builder completes each phase: slab, frame, lockup, fixing, and practical completion. The borrowers pay interest only on the amount drawn down during construction, which starts low and increases with each progress payment. Once the build is complete and the final inspection is done, the loan converts to a standard home loan with principal and interest repayments.
How Construction Loans Release Funds During the Build
Construction loans release funds in instalments tied to specific milestones in the building process. The builder submits a claim after completing each stage, and the lender arranges a progress inspection to confirm the work is done. Once verified, the lender releases the next payment directly to the builder. This is called a progressive drawdown, and it protects both you and the lender by ensuring money is only paid for work that has been completed.
Most lenders use a five-stage progress payment schedule: base stage (including slab), frame stage, lockup stage (roof and windows), fixing stage (internal fit-out), and practical completion. Some lenders offer a six-stage schedule that splits the base and frame stages further. Each stage represents roughly 20% of the total build cost, though the exact breakdown depends on the contract. The builder cannot request payment until that stage is finished. You only pay interest on the amount that has been drawn down, so if $100,000 has been released, you pay interest on $100,000, not the full loan amount.
Lenders charge a Progressive Drawing Fee each time they inspect and release funds. This fee typically ranges from $300 to $500 per inspection and covers the cost of sending a valuer or inspector to site. Some lenders cap the total number of inspections, while others allow additional drawdowns if your contract includes variations or if stages are split further. Factor these fees into your budget at the start.
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Using Your Existing Property as Security for a Knockdown Rebuild
If you own the property you plan to knock down, you can use it as security for the construction loan. The lender values the land without the existing dwelling and assesses your loan amount against the projected value of the completed home. This means you do not need to sell your property or find alternative accommodation during the build, though you will need somewhere to live while construction is underway.
The lender will require council approval for the demolition and a development application for the new build before they settle the loan. You will also need a fixed price building contract with a registered builder. Most lenders will not approve a cost plus contract or owner builder finance for a knockdown rebuild unless you have significant building experience and equity. The contract must specify a progress payment schedule that aligns with the lender's drawdown stages, and the builder must agree to invoice the lender directly for each stage.
If you still have a mortgage on the existing property, you will need to refinance that loan into the new construction loan or pay it out at settlement. The lender assesses your borrowing capacity based on your ability to service the construction loan during the build and the standard loan once it converts. This is particularly important if you are paying rent elsewhere while the build is underway, as the lender will factor that into your expenses.
What Happens Between Demolition and Practical Completion
Once the loan settles, demolition can begin. The lender holds the approved loan amount and releases the first payment when the base stage is complete. During construction, you pay interest only on the amount drawn down. This keeps repayments lower while the build is underway, but you need to budget for the fact that repayments increase with each stage.
Most construction loans require you to commence building within a set period from the Disclosure Date, usually 12 months. If there are delays in obtaining council approval or if the builder cannot start on time, you may need to apply for an extension. Some lenders charge a fee for this, while others allow one extension at no cost. Once the build starts, the builder must complete the work within the timeframe specified in the contract. If the build runs over, you may face additional interest charges during the extended construction period.
At practical completion, the builder issues a certificate confirming the home is finished and habitable. The lender arranges a final inspection, releases the last payment, and converts the loan to a standard home loan. You move from interest-only repayments to principal and interest repayments, and the loan is now secured against the completed home rather than the land alone.
Fixed Price Contracts and Managing Variations
A fixed price building contract is essential for securing construction finance. The contract locks in the total build cost, and the lender approves your loan based on that figure. If the build costs more than expected, you will need to cover the difference from your own funds unless you have a contingency buffer built into the loan amount.
Variations can occur if you change the design or specifications after the contract is signed. The builder will issue a variation order, and you will need to approve the additional cost. If the variation is significant, the lender may require an updated valuation to confirm the end value still supports the loan amount. Small variations are usually manageable, but substantial changes can delay drawdowns or require additional equity.
Some builders include a provisional sum in the contract for items like landscaping, driveways, or site costs that depend on conditions discovered during construction. These sums are estimates, and the final cost may be higher or lower. Make sure you understand what is included in the fixed price and what is provisional before you sign. The lender will assess the total contract value, including provisional sums, when approving your loan.
Construction Loan Interest Rates and Repayment Options
Construction loan interest rates are typically variable during the build, even if you plan to fix the rate once the loan converts. Lenders charge variable rates during construction because the loan amount increases progressively, and fixing a rate on a changing balance is impractical. Once the build is complete, you can choose a variable rate, a fixed rate, or a split rate depending on your preference.
During construction, you make interest-only repayments on the amount drawn down. These repayments increase as each stage is completed and more funds are released. Once the loan converts to a standard home loan, you switch to principal and interest repayments. Some lenders allow you to continue interest-only repayments for a set period after completion if you meet certain criteria, such as holding an investment property or needing time to adjust to the higher repayment amount.
If you plan to live in the home once it is built, you may be eligible for first home buyer concessions or grants if this is your first property. These concessions can reduce stamp duty or provide a cash grant, though eligibility depends on your circumstances and the value of the land and build combined.
When you are ready to move forward with your knockdown rebuild project, call one of our team or book an appointment at a time that works for you. We work with lenders who understand construction finance and can structure a loan that aligns with your build timeline and budget.
Frequently Asked Questions
Can I use my existing property as security for a knockdown rebuild loan?
Yes, you can use your existing property as security. The lender values the land without the old dwelling and assesses your loan based on the projected value of the completed home. You will need council approval and a fixed price building contract before the loan settles.
How do construction loans release funds during a knockdown rebuild?
Construction loans release funds in instalments tied to specific build stages, such as slab, frame, lockup, fixing, and practical completion. The builder submits a claim after each stage, the lender inspects the work, and then releases payment. You only pay interest on the amount drawn down at each stage.
What is a progressive drawdown and how does it work?
A progressive drawdown means the lender releases funds in stages as construction progresses rather than providing the full loan amount upfront. Each payment is tied to a completed milestone, confirmed by a progress inspection. This protects both the borrower and lender by ensuring funds are only paid for work that is finished.
Do I need a fixed price building contract for a knockdown rebuild loan?
Yes, most lenders require a fixed price building contract with a registered builder. The contract locks in the total build cost, and the lender approves your loan based on that figure. Cost plus contracts or owner builder arrangements are rarely accepted unless you have significant building experience and equity.
What happens to my repayments during the construction phase?
During construction, you make interest-only repayments on the amount drawn down. These repayments increase as each stage is completed and more funds are released. Once the build finishes, the loan converts to a standard home loan with principal and interest repayments.
