Building a new home can make a lot of sense for first home buyers. In NSW, you could qualify for the $10,000 First Home Owner Grant on top of a stamp duty exemption, and you get a home designed the way you want. But the finance works quite differently from buying an established home.
How a construction loan works
Instead of the lender paying the full amount at settlement, money is released in stages as the builder completes work. These are called progress payments or drawdowns.
A typical schedule looks like this:
| Stage | Typical % of build cost |
|---|---|
| Deposit | 5% |
| Base / slab | 15% |
| Frame | 20% |
| Lock-up | 25% |
| Fixing | 20% |
| Practical completion | 15% |
Each stage is checked by the lender, often with an inspection, before the next payment is released.
You only pay interest on what's drawn
During construction, you usually pay interest only on the amount drawn down so far. Early on, that's small. By completion, you're paying interest on the full loan. After completion, the loan usually switches to principal and interest.
This helps if you're still renting during the build.
Land first, then build
Most first home builds involve two contracts:
- Land purchase. You settle on the land like a normal property purchase.
- Building contract. A fixed-price contract with a licensed builder.
Your lender will need both, plus council-approved plans, specifications and the builder's insurance. In NSW, home building compensation insurance is required for residential work over a set value.
The First Home Owner Grant when building
In NSW, the $10,000 grant is available when the combined value of land and home is up to $750,000. It's typically paid with the first progress payment to the builder, which reduces how much you need to draw from the loan early on.
You'll also pay no transfer duty on vacant land up to $350,000 under the NSW First Home Buyers Assistance Scheme, with a concession up to $450,000.
Using the 5% Deposit Scheme to build
The 5% Deposit Scheme can be used for land plus a building contract, or a house-and-land package. The combined value has to be under the price cap for the area. Some participating lenders don't offer construction loans under the scheme, so we check this early.
A worked example
Mia and Daniel are building in the Shoalhaven:
- Land: $330,000
- Build contract: $410,000
- Total: $740,000
- 5% deposit: $37,000
- First Home Owner Grant: $10,000
- Stamp duty on land: $0 (under $350,000)
The grant arrives with the first progress payment. They pay interest on small amounts at first while still renting.
Things that go wrong
Variations blow the budget. Upgrades and site costs (rock, slope, retaining walls) add up. Lenders usually won't increase the loan without a new approval, so you may need to pay extra in cash. Variations can also push you over the grant cap.
Build delays. Weather, supply shortages and builder problems can push completion out. Meanwhile you're paying rent and growing interest.
Builder insolvency. Builders have failed in recent years. Check their licence, history and financial standing. Home building compensation insurance helps, but it's not a quick fix.
Valuation at completion. The lender values the "as if complete" home before approving. A low valuation means a bigger deposit.
Tips before you sign with a builder
- Get a fixed-price contract with a clear inclusions list
- Allow a contingency of at least 5% to 10% for site costs and variations
- Make sure progress stages match what your lender will fund
- Don't pay the builder anything that isn't in the schedule
Frequently asked questions
Can I build with a 5% deposit?
Yes, through the 5% Deposit Scheme with a participating lender that offers construction loans.
When do I start paying principal?
Usually after practical completion. During construction, most lenders charge interest only on what's drawn.
Can I be an owner-builder?
Some lenders will lend to owner-builders, but policies are much stricter. Expect a lower LVR.
Planning to build your first home? Call Finfident on 0424 545 654. We'll check your budget, the grant and which lenders handle construction well.
This article is general information only and doesn't take into account your objectives, financial situation or needs. Figures, rates and scheme rules are current as at October 2026 and can change. Finfident Finance Brokers (ABN 94 679 280 801) is Credit Representative 569374 of Outsource Financial Pty Ltd (ACN 131 090 705), Australian Credit Licence 384324.