Quick answer: Most house and land investments are financed with two parts: a loan to settle the land, and a construction loan that pays the builder in stages as the home is built. You usually pay interest only on the amount drawn during the build. The bank values the finished home, and if that valuation comes in below your contract price, you have to cover the gap.
This guide explains how construction loans work, the loan choices investors face, and how to avoid the most expensive finance mistake on a house and land package.
How a Construction Loan Works
With a house and land package you normally sign two contracts: one for the land and one for the build. The land settles first, often when the land title is registered. The construction loan then releases money to the builder in progress payments as each stage is completed. Typical stages are:
- Deposit
- Base or slab
- Frame
- Lock-up
- Fixing
- Practical completion
The lender usually inspects or receives a builder’s invoice at each stage before paying. During construction, you typically pay interest only on the amount drawn so far, so repayments start small and rise as the build progresses. Rent only starts once the home is finished and tenanted, so budget for those months with no income.
The Valuation Risk on House and Land Packages
Before approving a construction loan, the lender values the property as if it were complete. If the valuation is lower than your land and build price, the lender bases its loan on the lower figure, and you have to make up the shortfall from your own funds.
This is where commissions matter. When a package is sold through a third party, the builder or developer commonly pays the seller a commission that’s built into the price. Builder commissions can run into tens of thousands of dollars. A price that includes a large commission is more likely to value short. Here’s how hidden commissions in house and land packages work.
Worried your package won’t value up?
We’ll check the price against comparable sales and land and build costs before you sign.
Lenders Mortgage Insurance (LMI)
If you borrow more than 80% of the property’s value, most lenders charge lenders mortgage insurance. LMI protects the lender, not you, if you default. It can cost thousands of dollars and is often added to the loan. Some investors use equity in an existing home as security instead, which can keep borrowing under 80% and avoid LMI.
Interest-Only vs Principal and Interest
On an interest-only loan, repayments cover only interest for a set period, usually up to five years for investors. Repayments are lower, which helps cash flow, but you don’t reduce the debt, and repayments jump when the interest-only period ends. Interest-only rates are often higher.
On a principal and interest loan, every repayment reduces the debt. Repayments are higher, but you build equity and usually pay a lower rate. Many investors use interest only during the build and early years, then switch. The right choice depends on your cash flow, other debts and plans.
Fixed vs Variable Rates
A fixed rate locks your repayments for a set period, which makes budgeting easier, but you may pay break costs if you sell or refinance early, and extra repayments are often limited. A variable rate moves with the market and usually allows offset accounts and extra repayments. Some investors split their loan between the two.
Comparison Rates
The comparison rate combines the interest rate with most fees and charges into one figure, so you can compare loans on a like-for-like basis. It’s based on a standard loan amount and term, so your actual cost may differ. Always compare comparison rates, not just headline rates.
Should You Use a Mortgage Broker?
A broker compares loans from a panel of lenders, helps with the application, and is usually paid a commission by the lender. Brokers must act in your best interests under the best interests duty. Construction loans have more moving parts than a standard loan, so a broker with construction lending experience can save you time and problems. REIN refers clients to independent broker partners and doesn’t arrange finance in-house.
Questions to Ask Before You Commit
- Has the lender confirmed it will lend on this estate and this builder?
- What happens if the valuation comes in below the contract price?
- What will repayments be at each build stage, and after completion?
- Will I pay LMI, and how much?
- When does the interest-only period end, and what will repayments become?
- Can I afford the repayments if rates rise by 2% or the property sits vacant for a month?
How REIN Helps
REIN acts only for buyers of new house and land packages. We check the price, contracts and any commission built in before you sign, which reduces the risk of a valuation shortfall.
REIN charges a service fee for our work, agreed in writing before you start. Where REIN receives a builder or developer commission on your purchase, we disclose it and rebate 100% (excluding GST) of it to you. The rebate typically covers the fee and more.
Common Questions
How do you finance a house and land package?
Usually with a land loan that settles when the land title registers, followed by a construction loan that pays the builder in stages. You typically pay interest only on the amount drawn during the build. The lender values the completed home before approving the loan, so the price needs to stack up.
What happens if a house and land package values low?
The lender bases the loan on the lower valuation, so you have to cover the shortfall from your own funds or renegotiate. A low valuation is a warning that you may be paying above market value, which can happen when commissions are built into the price.
Do I pay interest during construction?
Yes, but usually only on the amount drawn so far. Repayments start small and increase as the builder is paid at each stage. Rent doesn’t start until the home is complete and tenanted, so plan for holding costs during the build.
Before you sign anything…
Send us the package. We’ll check the price, any commission built into it and the contract terms, and tell you straight whether it stacks up. Free, no obligation.
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Written by the REIN Editorial Team. Researched with the help of AI tools, then fact-checked against the sources below. Last updated 1 October 2026.
Reviewed by Scott Fraser, founder of REIN, licensed real estate agent (NSW) with 10 years on the developer side of house and land.
Sources
- Moneysmart – Interest-only home loans, accessed 1 October 2026
- Moneysmart – Choosing a home loan, accessed 1 October 2026
- Moneysmart – Comparison rate, accessed 1 October 2026
About this article: This article is published by Real Estate Investors Network Pty Ltd (REIN). Statements of opinion are ours. If you believe anything in this article is inaccurate or out of date, please call us on 1300 446 445 and we will review it and correct it promptly. This is general information only. It does not take into account your objectives, financial situation or needs, and is not financial, credit, legal or tax advice. Rules differ between states and change over time. Consider seeking independent advice from a licensed professional before acting. A REIN service fee applies to our services, and where REIN receives a builder or developer commission in connection with a client’s purchase, it discloses and rebates 100% (excluding GST) of that commission to the client under its written service agreement.