Everything You Need to Know About House and Land Loans

How a House and Land Loan Differs from a Standard Home Loan

A house and land loan is actually two separate contracts rolled into one finance arrangement. You're purchasing land from a developer and entering a building contract with a builder, which means your lender releases funds in stages rather than as a single settlement. This affects how interest is calculated, when you start making repayments, and how much deposit you'll need.

Most lenders treat house and land packages as construction loans, even though you're buying through a project builder rather than engaging your own trades. The land settles first, which triggers your first payment to the lender. From that point, you'll typically pay interest-only on the drawn amount until construction completes and you move into principal and interest repayments. The building contract amount gets released in stages as the builder reaches milestones like slab pour, frame completion, and lock-up.

Consider a buyer purchasing a house and land package in Baldivis. The land portion settles at $220,000, and the building contract sits at $380,000. Once the land settles, the buyer starts paying interest on $220,000 while living in their current rental. Three months later, the slab goes down and the builder claims $76,000, which increases the loan balance to $296,000. Interest charges now apply to that higher amount. This continues through each construction stage until the home reaches practical completion, at which point the full loan amount of $600,000 is drawn and standard repayments begin.

The staged drawdown structure means you're not immediately servicing the full loan amount, but your repayments increase every time the builder claims a progress payment. Most buyers underestimate how quickly those interest charges add up during construction, particularly if the build takes longer than expected.

Deposit Requirements and Lenders Mortgage Insurance

You'll need at least a 5% deposit for most house and land packages, but that deposit applies to the total purchase price, not just the land value. A $600,000 package requires $30,000 in genuine savings, plus enough to cover stamp duty on the land, loan establishment fees, and legal costs. In Western Australia, stamp duty on $220,000 of land runs around $8,000, and you'll want another $3,000 to $5,000 set aside for settlement costs.

Anything below a 20% deposit triggers Lenders Mortgage Insurance, which protects the lender if you default. On a $600,000 loan with a 10% deposit, LMI typically costs between $15,000 and $20,000 depending on the lender. Most buyers capitalise this into the loan rather than paying it upfront, which increases the total amount borrowed and the interest paid over the life of the loan.

Some lenders offer LMI discounts for house and land packages in new estates, particularly if the builder has an existing relationship with that lender. Those discounts can reduce LMI by 10% to 15%, which makes a noticeable difference when you're already stretching to cover deposit and settlement costs. This is one area where working with a broker who knows which lenders offer builder incentives can save you several thousand dollars without changing the structure of your loan.

Interest-Only Periods During Construction

During construction, you're typically on interest-only repayments for the drawn portion of the loan. Once the home reaches practical completion and you receive the keys, the loan converts to principal and interest and you start paying down the balance. The interest-only period usually lasts between four and twelve months depending on how quickly the builder completes the home.

Interest charges during construction are calculated daily on whatever amount has been drawn. If $220,000 settles on the land and variable rates sit around 6.5%, you're paying roughly $1,200 per month in interest before the first progress payment. After the first draw of $76,000, that jumps to about $1,600 per month. By the time frame and roof go on and the loan balance hits $450,000, monthly interest charges reach close to $2,400.

Most buyers continue renting or living with family during construction, which means they're covering both rent and loan interest for several months. Budgeting for this overlap is one of the most overlooked parts of planning a house and land purchase. If your build runs over schedule, which happens more often than builders admit, you could be paying dual accommodation costs for longer than expected.

Fixed Rate or Variable Rate for Construction

You can't fix the rate on a construction loan until all funds are fully drawn. Lenders only offer fixed interest rates on complete loan amounts, not staged drawdowns. That means you'll start on a variable rate during construction, then have the option to fix once the home is finished and you've moved in.

Some buyers lock in a fixed rate at application, with the understanding that it won't activate until construction completes. If rates drop during the build, you're stuck with the higher rate you locked in months earlier. If rates rise, you've protected yourself. The timing risk sits entirely with you, and predicting rate movements across a six-month construction period is harder than most people assume.

A split loan structure makes sense once construction finishes. You might fix 60% of the loan to lock in certainty on most of your repayments, and leave 40% variable to maintain flexibility for extra repayments or potential rate cuts. This approach reduces exposure to fixed rate break costs if you need to sell or refinance, while still giving you protection against rate rises on the majority of your debt.

Offset Accounts and Repayment Flexibility

An offset account linked to your variable portion reduces the interest charged each month by offsetting your savings balance against the loan. If you have $15,000 sitting in a linked offset and your loan balance is $240,000, you're only charged interest on $225,000. During construction, when you're on interest-only, an offset account can noticeably reduce what you're paying each month while funds are being drawn.

Not all construction loans come with offset accounts by default. Some lenders charge a higher interest rate or an annual fee to include one. If you're planning to keep a decent savings buffer during the build or you're still working and able to funnel your income through the offset, the interest saved usually outweighs the fee. If your savings sit close to zero, paying extra for an offset feature you won't use doesn't make sense.

Once construction finishes and you've converted to principal and interest repayments, the offset account continues working the same way. Every dollar in the offset reduces the interest charged without locking funds into the loan, which means you can still access that money if you need it for furniture, landscaping, or unexpected costs that pop up after moving in.

Choosing Between Owner Occupied and Investment Loans

If you're building to live in the property, you'll apply for an owner occupied home loan, which typically offers lower interest rates than investment loans. If you're planning to rent the property out once it's built, you need an investment loan from the start. Lenders don't let you switch categories without refinancing, and deliberately misrepresenting occupancy is mortgage fraud.

Some buyers assume they can start with an owner occupied loan to get the lower rate, move in for a few months, then rent it out and claim the tax benefits. Lenders require you to occupy the property as your primary residence for at least six to twelve months before converting it to an investment without penalty. If you move out earlier, you're required to notify the lender and they'll reprice the loan to investment rates, which are usually 0.3% to 0.6% higher.

Interest on an investment loan is tax deductible, which changes the effective cost of borrowing. If you're earning a decent income and paying tax at 37%, a 6.8% investment loan rate costs you closer to 4.3% after tax. That deduction only applies once the property is genuinely available for rent, which means you can't claim interest during construction unless the property is tenanted during that period, and that's not possible with a house and land package.

Builder Incentives and Lender Cashbacks

Some project builders offer incentives like free upgrades, appliances, or contributions toward stamp duty if you use their preferred lender. Those incentives can be worth several thousand dollars, but they often come with the catch that the preferred lender's interest rate sits higher than what you'd get by comparing home loan options independently.

A builder might offer $10,000 in upgrades if you finance through their preferred bank, but if that bank's rate is 0.4% higher than another lender, you'll pay an extra $2,400 per year in interest on a $600,000 loan. Over five years, that's $12,000 in additional interest, which wipes out the value of the upgrades. The incentive only makes sense if the preferred lender's rate sits within 0.1% to 0.2% of the lowest rate available, or if the upgrades are things you'd otherwise pay for in cash.

Some lenders offer cashbacks of $2,000 to $4,000 when you take out a new home loan, including construction loans. These get paid once the loan fully settles, which for a house and land package means after construction finishes. The cashback can help cover furniture or moving costs, but similar to builder incentives, a lower interest rate usually delivers more value over the life of the loan than a one-off payment.

Pre-Approval and Contract Deadlines

Most house and land contracts include a finance clause that gives you 14 to 21 days to secure loan approval. That timeline doesn't leave much room for back-and-forth with lenders, which is why getting home loan pre-approval before signing the contract makes the process far less stressful. Pre-approval confirms how much you can borrow and locks in your loan structure, subject to property valuation and final income verification.

Valuations on house and land packages assess the land value and the proposed building contract separately. Lenders want to confirm the total package price aligns with comparable sales in the estate. If the builder is charging $600,000 and similar completed homes in the area are selling for $580,000, the lender may reduce the approved loan amount or ask for a larger deposit to cover the gap.

In outer Perth estates like Byford or Alkimos, where house and land packages make up a large portion of sales, lenders have strong valuation data and approvals move quickly. In smaller regional developments with fewer comparable sales, valuations take longer and carry more risk of coming in under contract price, which can derail settlement if you don't have extra cash to cover the shortfall.

Once you've signed the building contract and the land has settled, your finance is locked in and you're committed to the staged drawdowns as construction progresses. If your financial situation changes during the build, such as losing your job or taking parental leave, the lender still expects you to meet repayments as each progress claim is drawn. Planning for that risk before signing anything is far easier than managing it halfway through construction.

If you're weighing up a house and land package or comparing loan structures for your build, call one of our team or book an appointment at a time that works for you. We'll walk through the numbers and find a loan that fits your timeline and budget.

Frequently Asked Questions