Buying a property that needs renovation means arranging finance that covers both the purchase and the building work.
Most owner-occupier loans settle on day one and release the full amount to the seller. When you're purchasing a renovation project, you need a loan structure that holds back funds for the building work and releases them as the renovation progresses. That structure is called a construction loan, and it changes how much you pay upfront, how interest is charged, and when the property needs to be habitable.
How a Purchase Plus Renovation Loan Releases Funds
The loan splits into two parts: the purchase amount that settles on the day you take ownership, and the construction funds that release progressively as work is completed. The lender holds the construction portion in reserve and pays it out in stages, typically tied to progress inspections. Each time your builder completes a stage, they submit a claim, the lender arranges an inspection, and the next payment releases directly to the builder or into your account if you're managing payments yourself.
Consider a buyer purchasing a Hamilton worker's cottage close to Beaumont Street for renovation. The purchase price is $620,000, with an additional $180,000 budgeted for a rear extension, new kitchen, and updated bathroom. The lender advances $620,000 at settlement to complete the purchase, then releases the $180,000 across five progress payments as the builder moves through slab, frame, lockup, fixing, and practical completion. Interest is charged only on the amount drawn down at each stage, so in the first month, the buyer pays interest on $620,000, not the full $800,000 loan amount.
What Lenders Require Before Approving Construction Funds
Lenders assess the viability of the renovation before approving the construction component. They want to see a fixed price building contract signed with a registered builder, detailed council-approved plans, and evidence that the completed property will be worth more than the total loan amount. The contract needs to itemise the scope of work and tie payments to defined stages. If you're planning to act as an owner builder, most lenders either decline the application or require a higher deposit and charge a higher interest rate.
You'll also need to demonstrate that the renovation can commence within a set period from the loan settlement, usually 12 months. If council approval is still pending or the builder can't start within that window, some lenders will decline or ask you to reapply once the project is ready to begin. Others will approve conditionally but won't release construction funds until all approvals are finalised.
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Interest Charges During the Construction Period
During the building phase, most lenders offer interest-only repayments on the drawn amount. You're not required to pay down the principal while the property is uninhabitable, which keeps monthly costs lower while you're potentially paying rent or holding another property. Once the final progress payment is made and the renovation reaches practical completion, the loan converts to a standard principal and interest structure, or remains interest-only if that's part of your overall loan terms.
Some lenders charge a progressive drawing fee each time they release a payment, typically between $200 and $400 per drawdown. Across five or six payments, that adds $1,000 to $2,400 to the total cost of the loan. Not all lenders charge this fee, so it's worth comparing structures if you're managing a tighter budget.
How Deposit Requirements Change for Renovation Projects
Lenders typically require a larger deposit when the loan includes a construction component. Where a standard purchase might be approved with a 10% deposit plus lenders mortgage insurance, a purchase plus renovation loan often requires at least 10% of the total project cost as genuine savings, and some lenders ask for 20%. The increased requirement reflects the higher risk the lender takes on when funds are releasing progressively and the property is unliveable during part of the loan term.
If you're using equity from another property to fund the deposit, that equity is assessed against the total loan amount, including the construction funds. In that scenario, you'll need enough usable equity to cover both the deposit and the costs associated with settlement and the first stage of building work.
Council Approval and Development Application Timing
You can exchange contracts on a property before council approval is finalised, but most lenders won't release construction funds until a development application has been approved and all conditions satisfied. If your renovation requires DA approval rather than complying development approval, expect a longer timeline before building can commence. In the Lake Macquarie and Newcastle council areas, DA approvals for residential alterations and additions typically take 8 to 12 weeks from submission, and that assumes no objections or requests for further information.
Some buyers negotiate a longer settlement period to allow time for DA approval between exchange and settlement. That gives you certainty that the project can proceed before you take ownership, but it also locks you into the purchase if the DA is refused or comes back with conditions that make the renovation unviable.
Working with Builders, Plumbers, and Electricians on a Progress Payment Schedule
Your builder will usually engage plumbers, electricians, and other subcontractors and pay them as part of the overall contract. The progress payment schedule should align with the completion of defined stages, not calendar dates. Avoid contracts that release payments based on time elapsed rather than work completed, as that removes your leverage if the builder falls behind schedule or leaves stages incomplete.
If you're managing subcontractors yourself under an owner builder arrangement, the lender will still require a progress inspection at each stage before releasing funds. You'll need to coordinate the inspection, ensure all work up to that point meets the building code, and provide invoices for the work claimed. Most lenders won't release funds for materials purchased but not yet installed, so cash flow becomes tighter when you're managing the build yourself.
Renovation Finance for Properties That Need Structural Work
If the renovation involves structural changes such as removing load-bearing walls, underpinning, or restumping, lenders will scrutinise the builder's qualifications and the engineer's certification more closely. These projects carry higher risk, and some lenders will decline applications if the scope of structural work is significant relative to the purchase price. Others will approve but require a larger deposit or a more detailed contract that breaks structural work into separate stages with independent inspections.
Hamilton has a mix of post-war timber homes and older brick cottages, many of which were built before modern footings and structural standards applied. If you're purchasing one of these older homes with the intention of extending or altering the structure, expect the lender to ask for an engineer's report before approving the construction component.
When the Project Costs More Than the Initial Budget
If the renovation runs over budget, you'll need to cover the additional cost from your own funds unless you arranged a buffer in the original loan. Lenders approve construction loans based on the contract price and won't release additional funds mid-project without a formal variation and revaluation. If the variation is significant, the lender may decline the increase or require additional security.
Building a buffer into the original loan application is common, but it increases the total loan amount and requires a higher deposit to maintain the same loan-to-value ratio. If you're already borrowing close to your maximum capacity, adding a buffer may push the application over serviceability limits.
Call one of our team or book an appointment at a time that works for you if you're looking at a property that needs significant work and want to understand how the loan structure aligns with your building timeline and budget.
Frequently Asked Questions
Can I use a standard home loan to buy a property and renovate it?
A standard home loan releases the full amount at settlement, which works if you're funding the renovation from savings. If you need the renovation costs included in the loan and released progressively, you'll need a construction loan structure that holds back funds and pays them out as work is completed.
How much deposit do I need for a purchase plus renovation loan?
Most lenders require at least 10% of the total project cost as genuine savings, with some asking for 20%. The deposit is calculated on the combined purchase price and construction budget, not just the property price.
What happens if my renovation goes over budget?
You'll need to cover the additional cost from your own funds unless you built a buffer into the original loan. Lenders won't release extra funds mid-project without a formal contract variation and revaluation, and significant variations may be declined.
Do I pay interest on the full loan amount during construction?
You only pay interest on the amount drawn down at each stage. If the purchase amount has settled but only two of five construction payments have been released, you're charged interest on the purchase price plus those two payments, not the full approved loan.
Can I act as an owner builder on a purchase plus renovation loan?
Most lenders either decline owner builder applications or require a higher deposit and charge a higher interest rate. If approved, you'll still need progress inspections at each stage and must provide invoices before funds are released.
