House and land packages fund in two stages, not one
A house and land package requires two separate loan settlements: one when you purchase the land, and another when construction completes. The land component settles first, which means you start paying interest on that portion immediately while the house is being built. Most buyers don't factor in this holding cost when calculating whether they can afford the package.
Consider a buyer purchasing in Clyde North who secures a $450,000 total facility split between a $150,000 land loan and $300,000 for construction. That land loan converts to interest-only repayments the moment it settles, potentially $750 to $900 per month depending on current variable rates, before the construction loan even draws down. If the build takes twelve months, that's close to $10,000 in interest on an asset that isn't generating rental income or providing shelter yet.
The second settlement happens progressively as the builder reaches each stage: slab, frame, lockup, fixing, and practical completion. Your lender releases funds at each milestone, which means the interest you're paying gradually increases as more of the construction loan activates. You're essentially paying interest on a house you can't occupy while still covering rent or your existing mortgage elsewhere.
Pre-approval needs to account for two separate borrowing events
Your home loan pre-approval must cover the full package value, but lenders assess your capacity to service both the land loan and construction loan simultaneously during the build period. If you're stretching your borrowing capacity to the limit based on your completed home value, the interim servicing requirement can create issues.
Lenders calculate this by assuming you'll be paying interest on the land and principal-and-interest repayments on your current rental or mortgage at the same time. In some cases, they'll also factor in notional repayments on the portion of the construction loan already drawn, even if it's structured as interest-only during the build. This dual servicing test tightens your borrowing capacity compared to purchasing an established property.
If you're a first home buyer using the First Home Owner Grant or a stamp duty concession, the land value determines your eligibility in Victoria, not the total package price. That creates a strategic advantage for house and land packages in growth corridors like Cranbourne East or Melton South, where land values often sit below the concession thresholds even when the completed package exceeds them.
Construction loans require progress inspections and staged drawdowns
Your lender won't release the full construction amount upfront. Instead, they'll appoint a quantity surveyor or valuer to inspect the site at each building stage and confirm the work matches the builder's invoice before releasing funds. This protects both you and the lender, but it also means the builder's payment schedule must align with your lender's drawdown process.
Some builders operate on fixed-stage payments, others use a cost-plus model. If your builder invoices for work that your lender's valuer hasn't yet approved, you're caught between a contractual obligation to the builder and a lender who won't release funds. We regularly see this tension emerge during the frame stage, where builders push for payment before external cladding is complete but lenders withhold funds until lockup is verified.
The inspection and valuation process adds time. Most lenders need five to ten business days between receiving a drawdown request and releasing funds, which means you need to lodge requests well ahead of the builder's due date. Missing a payment to your builder can trigger penalty interest or, in extreme cases, contract termination.
Offset accounts only reduce interest on the active loan portion
If you're using a linked offset account to minimise interest, understand that it only offsets the drawn component of your loan. During construction, that means your offset balance reduces interest on the land loan and whatever portion of the construction loan has been released, not the full facility.
In a scenario like this: you have $30,000 sitting in offset, your land loan is $150,000, and $100,000 of your construction loan has drawn down for slab and frame. Your offset is working against $250,000 of debt, not the full $450,000 you were pre-approved for. The benefit grows as more of the construction loan activates, but during the early months, your offset is doing less work than it would on an established property purchase where the full loan amount is drawn from day one.
This also affects how you manage your savings during the build. Keeping cash in offset reduces your land loan interest, but you may need liquid funds for cost overruns, upgraded fixtures, or landscaping that wasn't included in the builder's base price. Locking all your savings into offset can leave you scrambling if the builder quotes an extra $15,000 for stone benchtops or upgraded flooring mid-build.
Fixed rates lock in at land settlement, not construction completion
If you're splitting your loan between fixed and variable, or locking in a fixed rate entirely, that rate applies from the moment each portion of the loan settles. The land loan fixes when the land settles. The construction loan typically fixes progressively as each drawdown occurs, unless you structure it to remain variable during construction and fix only at practical completion.
That creates a timing risk. If you fix your land loan now and rates drop during your twelve-month build, you're locked into the higher rate while new buyers are accessing lower ones. Conversely, if rates rise, you've protected yourself on the land component but the construction loan continues to draw down at whatever the variable rate is at each stage.
Some lenders allow you to lock a fixed rate at pre-approval but delay the start date until practical completion, so the entire loan fixes when the build is done. This removes the complexity of managing multiple rate types across two settlements, but it also means you're taking a view on where rates will be in twelve to eighteen months. If you get it wrong, the cost can exceed the value of the simplicity.
Lenders price house and land loans differently to established purchases
Not all lenders treat construction loans the same way they price established property purchases. Some load an additional margin on the interest rate to cover the valuation inspections and administrative effort involved in staged drawdowns. Others charge a flat fee for the construction process, typically $500 to $1,200, which sits on top of standard application and settlement fees.
If you're comparing home loan rates, confirm whether the advertised rate applies to construction loans or only to established properties. A lender offering a sharp variable rate on an owner-occupied established home might load 0.15% to 0.25% onto that same rate for a house and land package. Over a $450,000 loan, that's an extra $675 to $1,125 per year in interest.
Lenders also assess risk differently based on the builder. If you're using a volume builder with a strong track record in estates like Mernda or Point Cook, most lenders will approve without hesitation. If you're engaging a smaller custom builder or an owner-builder arrangement, expect stricter criteria, higher rates, or outright declines from certain lenders. The builder's financial stability matters because if they collapse mid-build, the lender is left with an incomplete asset securing a loan that's partially drawn.
LMI calculates on the total package value, even though you settle in stages
If your deposit is less than 20% of the total package value, you'll pay Lenders Mortgage Insurance, and it's calculated on the completed value, not just the land component. That means you're paying LMI upfront based on a $450,000 loan-to-value ratio, even though only $150,000 is drawn at land settlement.
The LMI premium is capitalised into your loan, which increases the total amount you're borrowing and the interest you'll pay over the life of the loan. For a 10% deposit on a $450,000 package, LMI could add $12,000 to $16,000 to your loan balance depending on your lender and employment profile. That cost sits on your loan from day one, accruing interest even though the asset generating that LMI charge won't be complete for another twelve months.
Some lenders allow you to capitalise only the land component's LMI at first settlement and add the construction LMI at second settlement, which defers part of that interest cost. Others require the full LMI premium upfront. The difference in total interest paid over a thirty-year loan term can be several thousand dollars depending on which approach your lender uses.
Call one of our team or book an appointment at a time that works for you
House and land packages deliver value in Victoria's growth corridors, but the financing structure demands precision. If you're ready to move forward, speak with someone who structures these loans daily and knows which lenders price them properly. Call our team or book an appointment at a time that works for you.
Frequently Asked Questions
Do I pay interest during the construction phase of a house and land package?
Yes, you pay interest on the land loan from the moment it settles, and interest on the construction loan increases progressively as each stage draws down. This means you're servicing a growing debt while the house is being built, often while still paying rent or a mortgage elsewhere.
How does pre-approval work for a house and land package?
Pre-approval must cover the full package value, but lenders assess your capacity to service both the land loan and construction loan at the same time during the build. This dual servicing test is stricter than an established property purchase and can reduce how much you're approved to borrow.
Can I use an offset account during construction?
Yes, but the offset only reduces interest on the drawn portion of your loan. Early in the build, only the land loan and initial construction drawdowns are active, so your offset balance works against less debt than it would on a fully drawn established property loan.
When does a fixed rate start on a house and land loan?
A fixed rate typically starts when each portion of the loan settles. The land loan fixes at land settlement, and the construction loan can fix progressively at each drawdown or remain variable until practical completion, depending on how you structure it with your lender.
Is Lenders Mortgage Insurance charged on the land value or the total package?
LMI is calculated on the total package value if your deposit is less than 20%, even though the loan draws down in stages. The premium is usually capitalised into your loan upfront, which means you're paying interest on that LMI cost from land settlement.
