Why House and Land Packages Need Different Loan Handling

You're Not Buying One Thing

A house and land package is two separate transactions: one for the land, one for the build. You sign two contracts, settle the land first, then fund the construction through progress payments as the builder completes each stage. Most lenders treat this as a construction loan, not a standard purchase, which changes how deposit, pre-approval, and funding work from day one.

Land Settlement Happens Before the Build Starts

You settle the land component before construction begins. The lender advances the funds to purchase the land, and the title transfers to your name. From that point, you own the land, and the lender holds a registered mortgage over it. If you're using a variable rate, interest starts accruing on the land portion immediately, even though the house hasn't been built. Some buyers in Sydney's growth corridors in the Blacktown or Penrith areas have settled land parcels and then waited three to six months for the builder to commence, paying interest on land they can't occupy or rent. The construction contract sits separately, and the lender holds the remaining loan funds in reserve until progress claims are submitted.

Progress Draws Replace a Single Settlement

Once construction begins, the lender releases funds in stages based on the builder's progress claims. Typical stages include base stage, frame stage, lockup stage, fixing stage, and practical completion. The lender usually requires an independent inspection or valuation at each stage before releasing the next draw. You pay interest only on the amount drawn down so far, not the full loan amount, until construction completes. A buyer purchasing a house and land package in the Rouse Hill precinct with a build contract of $650,000 might have $150,000 released at base stage, $200,000 at frame, $150,000 at lockup, $100,000 at fixing, and $50,000 at completion. Interest compounds on the drawn portion, so the longer the build, the more interest accrues before you move in.

Deposit Structure Splits Across Two Contracts

You need a deposit for the land and a deposit for the build. The land deposit is usually 10% of the land price and is paid to the developer or land seller. The build deposit, often 5% to 10% of the construction price, is paid to the builder. These deposits are separate, and the total deposit you need upfront is the sum of both. If you're using the Australian Government 5% Deposit Scheme, you still need to meet the 5% threshold on the combined package price, but the way that deposit is allocated between land and build depends on the contracts and the lender's requirements. Lenders don't always allow you to use equity from another property or a gift as deposit for the build contract, so check before you sign.

Pre-Approval Needs to Cover Construction Risk

Pre-approval for a house and land package must account for the construction period, the progress draw schedule, and the final valuation on completion. Lenders assess your capacity to service the loan during construction, when you may be paying interest on the land and the drawn portion while also covering rent elsewhere. If your income is variable or you're self-employed, lenders scrutinise your ability to manage dual outgoings over a 12 to 18 month build. Some lenders cap the loan-to-value ratio at 90% for house and land, others at 85%, and a few non-majors will go to 95% with LMI if your deposit and income stack up. The property price caps for the 5% Deposit Scheme in Sydney are $1,500,000 in the city and regional centres and $800,000 in other areas, and those caps apply to the combined land and build price, not just the land.

Fixed Rates Lock In Before the House Exists

If you fix your rate, the fixed period usually starts from land settlement, not practical completion. That means you could be locked into a rate for six to twelve months before you move in, and if rates drop during construction, you're stuck. Split rate structures let you fix part of the loan and leave part variable, which can reduce exposure if the build drags or if you want the flexibility of an offset account on the variable portion. Some lenders don't allow offset accounts on the construction portion during the build, only after you convert to principal and interest repayment post-completion. Others let you link an offset from day one, but only to the variable split. A tradie buying in the Schofields area with a $900,000 total package locked in a three-year fixed rate at land settlement, then watched the build stretch to 14 months due to weather and material delays. By the time they moved in, variable rates had dropped, and they were paying 0.4% more than they needed to for the next two years.

Lenders Mortgage Insurance Applies to the Full Package

If your deposit is below 20% of the combined land and build price, LMI is calculated on the total loan amount, not just the land portion. The premium is charged upfront or capitalised into the loan at land settlement, even though the full loan hasn't been drawn yet. LMI premiums for house and land packages can be higher than for established homes at the same LVR, because the lender is funding a construction project with completion risk. If the builder goes under or the project stalls, the lender is exposed on a part-built asset that's harder to recover. For self-employed buyers, some LMI providers add a loading or require a larger deposit if you've been trading for less than two years, even if the lender is comfortable with your income.

Why Valuations Happen Twice

The lender orders a valuation at pre-approval stage based on the land price and the estimated value of the completed package. That valuation is used to set your loan amount and LVR. A second valuation is ordered at practical completion to confirm the finished property matches the contracted build and the initial valuation estimate. If the completion valuation comes in lower than expected, the lender may require you to reduce the loan amount or inject additional funds to meet the agreed LVR. This is more common in outer growth areas where land values are volatile or where the market has shifted between contract signing and completion. Buyers in the Box Hill or Marsden Park areas have seen completion valuations fall $30,000 to $50,000 short of the contract price when the market softened during a long build, and the lender has called for the gap to be funded from savings or family before final drawdown.

Interest-Only During Construction is Not Optional with All Lenders

Most lenders automatically put house and land loans on interest-only repayment during the construction period, then switch to principal and interest once the build completes. A few lenders let you make principal and interest payments from land settlement if you want to chip away at the balance early, but the majority don't offer that choice. Once construction finishes and you convert to principal and interest, the loan term restarts from that point, not from land settlement, unless you negotiate otherwise. That means if you settled land in January and the build finished in December, your 30-year loan term runs from December, not January, unless you explicitly ask the lender to backdate it.

The Build Contract Needs Lender Approval

Lenders review the build contract before approving the construction loan. They check that the builder is licensed, insured, and that the contract includes progress payment milestones, retention clauses, and defect liability terms. If the contract is non-standard or the builder isn't on the lender's approved list, the loan may be declined or restructured. Volume builders in the Sydney market like Metricon, Rawson, and Eden Brae are generally pre-approved by all major lenders, but smaller or boutique builders may require additional vetting. The builder's Home Warranty Insurance certificate is mandatory and must cover the full contract price. Without it, no lender will fund the build.

Why Timing the Land Purchase Matters

If you settle the land and the builder isn't ready to start, you're paying interest on an empty block. Some developers stage land releases and sync them with builder schedules, others don't. Buyers who signed contracts in late 2025 in the Riverstone or Vineyard release areas have faced settlement dates brought forward by the developer, forcing them to settle land and start paying interest months before the builder could begin. Once you own the land, you also pay council rates, water charges, and any levies from day one, even if there's no dwelling. If you're holding another property at the same time, your serviceability has to cover both.

Call one of our team or book an appointment at a time that works for you. We'll structure the loan to match the contracts, the draw schedule, and the way you actually get paid, not the way the bank wishes you did.

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