Most lenders treat house and land packages as two separate transactions, and that changes how your deposit is structured, when you draw down funds, and which loan features apply at each stage.
How House and Land Package Finance Is Structured
You're settling on land first and a completed dwelling months later. The lender splits the loan into two components: a land loan that settles when you take ownership of the block, and a construction or progress drawdown facility that releases funds as the build reaches each milestone. Some lenders combine these into a single approval with staged drawdowns, while others require separate contracts. Either way, your deposit applies to the land component first, and the build contract becomes the basis for the second drawdown. If you're using the Australian Government 5% Deposit Scheme, the guarantee applies to the combined land and build value, but the lender still settles the land portion before releasing any construction funds.
Consider a dentist purchasing a house and land package in a growth corridor. The land settles at $350,000, and the build contract is $480,000. The lender approves a total loan of $830,000 with a 10% deposit of $83,000. At land settlement, $350,000 is drawn down, and the buyer begins paying principal and interest on that amount. Over the following eight months, the builder reaches four progress milestones, and the lender releases $480,000 in four tranches directly to the builder. Once the dwelling is complete and final inspection is done, the loan converts to a standard owner-occupied home loan with a linked offset account. During the build phase, the buyer was paying interest only on the land loan and progressively more as each construction payment was released, but wasn't yet benefiting from offset or redraw on the construction portion.
Pre-Approval Timing and Valuation Requirements
Lenders base approval on a combined land and build valuation, but they won't release construction funds until the contract, plans, and builder credentials are assessed. Getting loan pre-approval before you sign the land contract gives you certainty on borrowing capacity, but the builder's contract and the valuer's assessment of the completed dwelling determine whether the full loan amount is available. If the valuer assesses the finished property below the combined purchase price, the lender may reduce the approved amount or ask for a larger deposit. Some lenders accept the purchase price as the security value if the package is from a volume builder in an established estate, while others insist on a formal valuation of the completed dwelling before approving the construction drawdown.
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What Happens Between Land Settlement and Build Completion
You're paying interest on the land loan and progressive construction drawdowns from the day each amount is released, but you're not living in the property yet. Most lenders offer interest-only repayments during the construction period, which keeps your monthly commitment lower while you're also paying rent or living elsewhere. Once the build is complete and you move in, the loan converts to principal and interest unless you've structured it otherwise. Offset accounts usually don't link to the construction facility, so any savings you hold during the build won't reduce interest on those progressive drawdowns. That changes once the loan consolidates after final settlement. Some lenders allow a linked offset on the land loan component during construction, but the rules vary.
Lender Assessment of Builder Risk and Construction Timelines
Lenders assess the builder's financial stability, insurance, and track record before approving the construction drawdown. If the builder doesn't hold adequate insurance or has a history of project delays, the lender may decline the application even if you've already settled on the land. Most major lenders maintain a panel of approved builders, and packages from volume builders in established estates are generally assessed faster than custom builds with smaller or newer builders. Construction timelines also affect approval. If the contract allows an open-ended build period or includes clauses that let the builder delay indefinitely, some lenders treat that as higher risk. Dentists purchasing in regional areas sometimes encounter longer approval times because fewer builders in those areas meet the lender's panel criteria.
Split Loan Structures and Offset During Construction
If you're planning to use a split loan structure with a portion fixed and a portion variable, most lenders won't activate the fixed rate until the construction is complete and the loan consolidates. During the build, you're typically on a variable rate across both the land loan and the progressive drawdowns. That means if rates rise during the six to twelve months it takes to complete the build, your repayments increase before you've even moved in. Some lenders allow you to lock a fixed rate at the time of land settlement, but the rate applies only to the land portion, and the construction drawdown remains variable. Once the build is finished, you can restructure the loan into fixed and variable splits and link an offset account to the variable portion. That's when the loan starts to function like a standard owner-occupied home loan with the features you'd expect.
Deposit Structure and LMI on Combined Land and Build Value
Your deposit percentage is calculated on the combined land and build value, not just the land. If you're borrowing more than 80% of the total package price, Lenders Mortgage Insurance applies to the full loan amount, but the premium is usually charged at land settlement. That means you're paying LMI on the entire $830,000 loan even though only $350,000 has been drawn down at that point. Some lenders allow you to capitalise the LMI premium into the loan, which reduces your upfront cash requirement but increases the total amount you're borrowing. Dentists using profession-based LMI waivers need to confirm the waiver applies to house and land packages, as some lenders restrict waivers to established dwellings or limit them to certain loan-to-value ratios.
What to Confirm Before You Sign the Land Contract
Once you've signed the land contract, you're committed to settling even if the lender later declines the construction portion or reduces the approved amount. Before you sign, confirm the lender has assessed both the land value and the completed dwelling value, reviewed the builder's contract and credentials, and issued a formal approval that covers the full package price. If you're using a government scheme like Help to Buy or the 5% Deposit Scheme, confirm the package price falls within the relevant property price caps for your state and that the builder's contract meets the scheme's eligibility criteria. Some buyers assume pre-approval for a certain amount means the lender will fund any property up to that limit, but house and land packages require additional checks that can change the outcome.
Call one of our team or book an appointment at a time that works for you. We'll structure your house and land package loan to match your build timeline, confirm which features apply at each stage, and make sure your approval covers both the land and construction components before you commit.
Frequently Asked Questions
How is a house and land package loan structured?
Most lenders split the loan into two components: a land loan that settles when you take ownership of the block, and a construction facility that releases funds as the build reaches each milestone. Your deposit applies to the land first, and the build contract determines the second drawdown.
Can I use an offset account during the construction period?
Offset accounts usually don't link to the construction facility, so savings held during the build won't reduce interest on progressive drawdowns. Some lenders allow a linked offset on the land loan component during construction, but the rules vary.
When is Lenders Mortgage Insurance charged on a house and land package?
If you're borrowing more than 80% of the combined land and build value, LMI applies to the full loan amount and is usually charged at land settlement. That means you're paying LMI on the entire loan even though only the land portion has been drawn down at that point.
What happens if the lender declines the construction portion after I've settled on the land?
Once you've signed the land contract, you're committed to settling even if the lender later declines or reduces the construction portion. Confirm the lender has assessed both the land and completed dwelling value and reviewed the builder's contract before you sign.
Do fixed rate loans apply during the construction period?
Most lenders won't activate a fixed rate until construction is complete and the loan consolidates. During the build, you're typically on a variable rate across both the land loan and progressive drawdowns, which means your repayments can increase if rates rise during construction.
