In a bid to boost housing supply, the government is steering buyers toward building, but securing finance can be complex and competitive.
In a clear indication that the 2026 Federal Budget housing measures could move the needle for much-needed new homes in Australia, Mortgage Choice figures show that construction loans are already on the rise.
New data shows that construction loans handled by Mortgage Choice have risen by 38% in the last 12 months to May, more than any other loan type.
The number of construction loans are expected to grow even more on the back of the tax changes announced in the budget given it aims to encourage borrowers to build new, rather than buy existing housing stock.
Investors will no longer be able to negatively gear existing homes purchased after 12 May and will instead need to funnel their money into new build alternatives if they want to keep reaping the benefits of the tax strategy.
The new build market is competitive, with an 8% increase in new home starts during the December 2025 quarter, Australian Bureau of Statistics figure show. Higher density home starts also rose by 19.9%, while detached house commencements dipped by 0.7%. It represents the strongest quarter for new home building starts since September 2021.
There was an 8% increase in new home starts during the December 2025 quarter. Picture: Getty
What are construction loans?
Construction loans differ from regular home loans. In the case of a traditional home loan, the funds are provided to the borrower in a single lump sum, while a construction loan lets borrowers draw on the loan balance when payments need to be made to the builder.
Applying for a construction loan is much the same as applying for a standard home loan. A lender will want to see proof of income, evidence of savings and a record of any debts against a potential borrower's name. These details provide an indication that the individual has the financial capacity and personal discipline to repay the loan.
Progress payments are made at key stages of the building process and are dependent on builders meeting key milestones and agreed times. While dependent on lenders, the a 95% Loan to Value Ratio is generally requires.
These types of loans can be budget friendly given that repayments will generally be interest-only until the home is completed and you won’t need to repay any of the principal until the full loan balance is drawn down.
While lower monthly repayments at a time when you may be paying rent sounds positive, build stages are not equally divided across the time period of the build, meaning repayment levels could shoot up suddenly.
Mortgage Choice case study: Liz and Andrew
Liz and Andrew are using a $300,000 construction loan to build their new home. Their interest rate is 5.00% p.a, with a one-month gap between each progress payment.
Interest is charged only on funds that have been drawn down at the time of each progress payment. As the build progresses, some stages are completed faster than others. This means Liz and Andrew sometimes receive two progress payments in the same month and their interest repayements change frequently.
Construction is completed after 23 months and with the last loan progress payment finalised, Liz and Andrew's mortgage reverts to principal and interest payments. The duo are able to move into their home and out of their rental property in time to start repaying the additional principal cost.
Construction loans start out as interest-only, but revert to principal and interest when the property is finished. Picture: Getty
Land locked
Brokers warn that the competition in the new homes space starts long before conversations on home loans, with securing residential land an ongoing challenge across the nation.
Mortgage Choice broker Larissa Barton points out that there’s not enough residential land in place, with new land releases hard to come by.
“We already have people lining up to buy new land releases, which means the changes announced in the budget to stimulate housing construction will be stymied," she warned.
Ms Barton was hoping that the budget announcements would go one step further by removing the burden of stamp duty.
“The hurdles involved in unlocking new land releases takes forever to have more residential land released for purchase,” Ms Barton said.
Meanwhile, construction industry giants also point out that the nation continues to miss Housing Accord targets, meaning construction loan borrowers could have a long time to wait for their new home.
“Australia has amassed a 77,500-home shortfall since the start of the National Housing Accord, with these latest figures meaning that an unprecedented 262,140 new homes per year need to be built over the remained of the Accord’s term to 2029,” Master Builders Australia chief economist Shane Garrett said.
The association is calling for number of holistic policy settings to drive stronger building and construction activity in an industry it says employs 1.3 million Australians.
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