Key Takeaways
- A renovation loan stays a straightforward increase on your existing home loan while the work is cosmetic and the lender is not relying on the value after completion.
- Structural work needing council approval, a valuation done on an as-if-complete basis, or a construction amount above a lender’s threshold usually forces a construction loan.
- Progress payments release funds in stages against work already done, commonly five stages from slab to practical completion.
- An equity release pays in one amount with no valuer checking each claim, which is quicker and leaves the builder risk sitting with you.
You have quotes, you have equity in the home, and the lender has started asking for council-approved plans and a fixed price contract. Nothing about a new kitchen felt like construction until that moment.
Which product you end up with sits in lender credit policy, and it turns on what the work does to the building, whether the lender needs the finished value to make the numbers work, and how much of the loan is going into the build.
Working out which side you land on before you sign a building contract is the part worth settling early, because the structure decides how the money reaches your builder and when. That is the first thing a construction loan broker checks when renovation plans come across the desk.
The lender policies named here are examples only, current at the time of writing and subject to change without notice.
What Pushes a Renovation Into Construction Lending
Seven things move a job from a standard increase into a construction facility:
Approvals Required for Structural Work
New cabinetry, flooring, paint and a bathroom fit-out that leave the structure alone are usually funded as an increase on the existing loan. AMP Bank’s credit policy treats an extension or renovation involving structural changes that require council approval as a construction purpose.
In New South Wales, that approval is either a development application through your council or a complying development certificate issued by a registered certifier.
Valuations Based on Finished Value
Where the lender needs the finished value to support the loan, the request becomes construction lending, whatever the work is called. Macquarie Bank’s credit guidelines state that home improvement or renovation loans relying on the on-completion value must be assessed as a construction loan, with the bank controlling the release of funds direct to the supplier on receipt of an invoice and a signed customer authority.
Amounts Set by Lender Thresholds
Dollar size pushes a file across on its own at some lenders. AMP requires a construction facility where the loan amount for construction is $100,000 or more. Macquarie sets a minimum construction loan of $150,000, so smaller jobs sit outside that product entirely and have to be funded another way.
Land Values Measured Against Loan Size
Macquarie’s policy allows equity release for structural renovations to remain a standard loan where the loan sits at or below 80% of the as-is valuation and does not exceed the land value of the security, with no building contract, council plans or progress drawdowns required. Two conditions still apply, being confirmation that a licensed builder is engaged for the structural work and the proposed build cost provided to the lender.
On an established Sydney block where land carries most of the value, that pathway is often open. On a newer property where the dwelling carries most of it, often not.
Dwellings Counted Under Development Limits
Macquarie’s construction purpose covers the immediate building of up to two residential dwellings or renovations on an existing property, and it treats construction of more than two dwellings as development finance, which it lists as unacceptable. AMP finances a maximum of two dwellings simultaneously. A granny flat alongside the existing house sits inside that limit at both lenders. A third dwelling does not.
Builders Engaged Under Fixed Price Contracts
Macquarie requires the work to be performed by a fully licensed contracted builder and to commence within three months of the initial loan settlement.
AMP excludes labour-only contracts, split contracts where the land contract names a specific builder, kit and relocatable homes, and non-arm’s length arrangements such as a family member’s building company working for a relative. Where your arrangement does not fit that shape, the construction product may be unavailable even though the work clearly is construction.
Owner Builders Excluded From Policy
Managing the build yourself takes the construction loan off the table at both lenders. Macquarie treats loans to owner builders as unacceptable, and AMP lists owner builders as an exclusion from construction lending.
In New South Wales, an owner-builder permit is required where the reasonable market cost of labour and materials exceeds $10,000, with an approved education course required where the work is valued over $20,000. Funding an owner-built project usually means a standard release measured against as-is value.
How Progress Payments Release the Money
Under a construction loan, the money is released in pieces, against work a third party has confirmed is finished:
Drawing Funds Against Completed Stages
The building contract sets a schedule and the lender pays against it. Macquarie’s guidelines give a standard example of five stages:
- Foundations or slab, including the deposit, at 20%.
- Frame at 20%.
- External lining at 30%.
- Lock-up and internal lining at 20%.
- Practical completion at 10%.
Five stages are standard and up to eight sit within Macquarie’s normal parameters. The bank checks that the schedule is not front-loaded, meaning no stage pays the builder more than the share of work actually completed by that point. Schedules and stage percentages differ by lender and by builder, so treat the figures above as a general guide.
Contributing Borrower Funds Before Drawdown
Your money goes in first. AMP requires the applicant’s own funds to be used before any bank loan funds are drawn, and requires the owner’s full equity at the initial land settlement on a knockdown rebuild.
Borrowers who budgeted on the loan carrying the early stages are the ones caught by this, because the builder’s deposit often falls due before any of the facility is available.
Ordering Inspections Before Stage Releases
Someone independent confirms the stage is done. Macquarie requires valuer certification of only the first and final draws where the building contract is $600,000 or less, and a valuer inspection at every progress payment above that figure.
AMP scales it by contract amount. Contracts up to $1.5 million need an as-if-complete valuation before the first payment and a final valuation at the end. Between $1.5 million and $2 million, an in-progress inspection at lock-up is added. Above $2 million, a quantity surveyor inspects at every stage, engaged at your cost.
Testing Cost to Complete Against Undrawn Funds
Before each release, AMP must be satisfied that the estimated cost to complete does not exceed the undrawn funds still available. Where it does, further drawdowns stop until the shortfall is addressed, either by you contributing funds with evidence or by an approved amendment to the facility.
The test catches a build running out of money while there is still something to be done about it.
Directing Payments to Builder Accounts
The money goes to the builder, not to you. AMP makes progress payments direct to the builder’s nominated bank account, and requires each progress payment request to be signed by every borrower. Before paying, it asks borrowers to advise of any dispute with the builder, and in the absence of that advice, the payment proceeds.
That step separates a lender able to hold a claim back on your behalf from one that has already handed you the money.
Paying Interest on Drawn Balances
Interest is charged on what has been drawn, not on the approved limit, so the early stages cost comparatively little. Most construction loans run interest only during the build and convert to principal and interest afterwards. AMP requires interest to be met monthly from a deposit account during construction, and where it agrees to capitalise the interest instead, the expected amount is included in the maximum loan amount and the valuation ratio.
That same interest-only structure feeds into your borrowing capacity the next time you apply, because lenders assess the repayment over the term remaining once the interest-only period ends.
Releasing Final Payments at Handover
AMP requires evidence of building insurance with the bank noted as first mortgagee, for an amount not less than the total construction cost or full replacement value, before the final progress payment is released. Before you can switch out of the construction product into a standard loan, the occupancy certificate or the equivalent state approval to live in the building must be provided.
What an Equity Release Gives Up
Where your job qualifies for a standard increase, the money lands in your account and none of those controls apply. That is faster and less restricted, and it moves several risks onto you:
The Valuer Who Never Attends
No independent party confirms the frame is up before the frame payment leaves your account. Macquarie’s policy is explicit that on a qualifying equity release for structural renovations, building contracts, council plans and progress drawdowns are not required and the bank will not control the release of funds to the supplier.
What replaces the valuer is you, deciding on site whether the stage is complete.
The Cost to Complete Nobody Tests
Nothing stops you being 70% spent and 40% built. The check that would block a further release under a construction loan has no equivalent when the full amount is already sitting in your offset account.
The Funds That Arrive in One Payment
The money lands before the builder needs it. Where a construction loan releases against work already done, a release hands you the full amount on day one and leaves the ordering to you and your builder.
The Schedule the Lender Never Reads
A front-loaded payment schedule gets pushed back under construction lending because the bank assesses it. On an equity release, the schedule is a matter between you and your builder.
The Overrun You Fund Yourself
Where the job runs over, the shortfall comes from savings, a smaller scope or a fresh application. That application is a new credit assessment at current rates and current policy.
The Speed You Gain in Return
The release is quicker to arrange, carries no progress payment or stage inspection fees, and leaves you free to use a smaller trade, stage the work over years or do parts of it yourself. For a contained job with a builder you know, that trade can be entirely reasonable. Taken by default because the paperwork was lighter, it usually is not.
What to Line Up Before You Apply
Most construction files stall on documents, not on credit. Six things are worth having in hand before submission:
Quotes for Full Scope of Works
A standard increase is supported by itemised quotes, invoices or a tender covering the amount requested. Lenders treat those documents as evidence of purpose, so a release that outruns the quote attached to it tends to be reduced to the quote.
AMP looks for standard documentation issued by the Master Builders Association or the Housing Industry Association, signed by all parties, with the progress payment schedule included. Where those contracts have been altered or a different contract used, AMP may charge additional investigation costs, and where progress claims exceed the standard four, additional progress payment fees.
Approvals From Council or Certifier
Council-approved plans and specifications should be provided before formal approval. Where approval is still pending, AMP accepts a copy of the plans submitted to council at the valuation stage, with the council-approved set required before the first progress draw.
Ordering the valuation without plans usually means a second valuation later at your expense, because the valuer needs to know what is being built.
Insurance Before First Drawdown
The builder’s indemnity or warranty cover and construction insurance are required before the first progress draw, and general home insurance before the final one.
In New South Wales, home building compensation (HBC) insurance is required on residential building work valued over $20,000 including goods and services tax unless an exemption applies, and the builder must hold it before taking a deposit or starting work, under the compensation scheme rules published by the State Insurance Regulatory Authority. New South Wales building laws are currently under reform, so the detail around approvals and practitioner obligations may change during 2026.
Timing Between Settlement and Start
Lenders set windows and they differ. Macquarie requires commencement within three months of the initial loan settlement and completion within 24 months. AMP requires construction to be completed within 12 months of loan approval.
A builder with a nine-month program and a start date four months out fits one of those and not the other. Those timeframes are published policy at the time of writing and can change, so treat them as a general guide.
Funds for Variations Outside Contract
Variations to an approved building contract need the lender’s prior approval. AMP requires an updated valuer or quantity surveyor report, at your cost, where a variation increases cost by more than $10,000 or 5% of the fixed contract price, whichever is the lesser.
Variations raised after settlement that were not part of the original assessment are met at your own cost, unless the approved loan already exceeds total costs and redraw is available. Holding a contingency outside the loan is how most borrowers manage that.
Valuation Type for Security Property
The as-is valuation values the property today. The as-if-complete valuation values it once the work is finished, and it is not simply today’s value plus the build cost.
AMP accepts the lower of the valuer’s estimate of improvements or the fixed contract figure. Macquarie bases the construction loan-to-value calculation on the lower of the on-completion valuation or the cost to complete, being the contracted construction price plus land value. A generous contract price does not lift the loan on its own.
Money That Reaches Your Builder on Time
The worry underneath most of these questions is not the paperwork. It is the prospect of signing a building contract, then finding the loan cannot release money the way that contract expects it to be paid.
That mismatch is avoidable, because both halves are knowable in advance. Your scope tells you whether an approval is coming. Your numbers tell you whether the loan works on today’s valuation or only on tomorrow’s. Your builder’s contract tells you when the money is needed and in what order.
Where you are working out whether your renovation needs a construction loan, the team at DIY Lending can talk you through how each option would be funded in your circumstances.
Frequently Asked Questions (FAQs)
1. Can I switch to a construction loan after the work has started?
Usually not without difficulty. Macquarie treats partially complete properties, including any property where construction has commenced in any form, as unacceptable security for a standard loan, and will only consider them under construction parameters where the builder who started the work is also completing it.
AMP excludes refinances of security properties where construction is in progress, and specifically excludes funding partly completed self-funded work. Starting on savings with the intention of financing the rest later can leave a project outside both products.
2. What happens if my builder becomes insolvent partway through?
HBC cover is the safety net in New South Wales. The State Insurance Regulatory Authority states that it protects homeowners for six years against major construction defects and two years for other defects, measured from the completion date.
icare, which manages the fund, sets out what a policy pays, being loss of deposit where work never commences, up to 20% of the contract price where work is not completed, and the cost of repair for defects, with maximum cover per dwelling of $340,000 for policies issued from 1 February 2012. The claim runs through the insurer, and your loan repayments continue while it does.
3. How long does approval take compared with a straightforward increase?
The credit assessment is broadly similar. What extends a construction file is the documents around it, being the executed contract, council-approved plans, an as-if-complete valuation and the insurances. Each carries its own lead time and none sits inside the lender’s control.
Matching the file to a lender whose window fits your builder’s program is part of what we do across our panel. Timing varies by lender and by application, so any estimate is a general guide only.
4. Can I renovate an investment property the same way?
The same policy triggers apply, since they attach to the work and the valuation, not to who lives there. The release is assessed as investment lending, which can change the rate and the servicing treatment.
The tax position is separate again, because whether the spend is treated as a repair or as a capital improvement affects when and how it is claimed. A registered tax agent is the right person to confirm how that applies to your return.
This article is general information only. It does not take your objectives, financial situation or needs into account, and it is not a recommendation to act. Lender policies, thresholds and figures referred to are drawn from published broker guidelines, are specific to the lender named, are current at the time of writing and may change without notice, and New South Wales building laws are under reform with further regulations still to be released. You may wish to speak with a qualified professional about your own circumstances before making a decision.