What are Construction Loans for Knockdown Rebuilds?

What Is a Knockdown Rebuild Construction Loan?

A knockdown rebuild construction loan finances the demolition of an existing property and construction of a new home on the same block. You borrow against the land value and building contract amount, with funds released progressively as construction milestones are reached rather than as a lump sum upfront.

This matters for ambulance officers working shifts because you're only paying interest on what's been drawn down at each stage. If your builder completes the slab and frame and you've drawn $150,000 of a $450,000 loan amount, you're charged interest on $150,000 while the rest sits undrawn. That difference can mean $800 to $1,200 less in monthly repayments during the build compared to paying interest on the full amount from day one.

Consider an ambulance officer refinancing a property in Geelong with an older dwelling. The land is valued at $420,000, the demolition and building contract totals $480,000, and the lender approves construction funding based on the finished value once the new home is complete. Instead of receiving $480,000 upfront, the funds release in instalments tied to the progress payment schedule: base stage, frame stage, lockup, fixing stage, and practical completion. At each stage, the registered builder submits evidence of work completed, a progress inspection confirms the milestone, and the next drawdown releases to pay sub-contractors, plumbers, and electricians.

How Does the Progressive Drawdown Work?

Funds release according to a construction draw schedule that matches your fixed price building contract. The lender holds the loan amount and releases portions as your builder reaches each stage, confirmed by a progress inspection arranged by the lender or an independent valuer.

Most construction to permanent loan structures follow a five-stage schedule: slab or base complete, frame and roof, lockup (walls and windows), internal fixing and services, and final completion. Each stage represents roughly 15% to 25% of the total contract value depending on the build. Your builder invoices for the stage, the lender arranges an inspection within a few days, and once confirmed, the drawdown processes within 48 hours in most cases. You don't manage this process directly beyond staying in contact with your builder and broker, but you do need to ensure council approval and development application requirements are met before the first drawdown.

Some lenders charge a Progressive Drawing Fee of around $200 to $400 per inspection to cover the cost of progress inspections. Others bundle this into the loan without separate line items. When comparing construction loan options from banks and lenders across Australia, ask your broker whether inspection fees are charged per stage or waived, as five inspections at $350 each adds $1,750 to your upfront costs.

What Happens Between Land Settlement and Construction Start?

You'll own the land and existing dwelling from settlement, and most lenders require you to commence building within a set period from the disclosure date, typically six to twelve months. During that window, you'll finalise council plans, engage your registered builder, and confirm the fixed price contract before construction funding can begin.

If you're still living in the existing property while arranging demolition and approvals, you're not making repayments on the construction portion yet because those funds haven't been drawn. You're only servicing the land loan, which in most cases converts to interest-only repayment options during the construction phase. That means if you've borrowed $420,000 for the land and you're on a construction loan interest rate of around current variable rates, your monthly repayment sits at roughly the interest component alone until the build completes and the loan converts to principal and interest.

In our experience, ambulance officers often coordinate settlement and demolition around rostered days off to be present for initial builder meetings and council sign-offs. The tighter your fixed price contracts are written and the more detailed your progress payment schedule, the fewer surprises you'll encounter once construction starts.

Can You Use a Knockdown Rebuild Loan for a Land and Build Package?

Yes, and the structure is almost identical. A land and construction package involves purchasing suitable land and contracting a builder in one transaction, whereas a knockdown rebuild starts with land you already own. Both use progressive drawdown and both require a fixed price building contract before construction finance is approved.

The difference shows up in deposit requirements and how lenders assess loan serviceability. For a land and build loan, you're typically borrowing against projected value, so lenders calculate your deposit against the combined land price and building contract. For a knockdown rebuild, the land is already owned or being refinanced, and the deposit applies to the construction portion. Some lenders treat knockdown rebuilds as refinancing with a construction top-up, others as a new construction loan secured against existing equity. Your broker structures this depending on which approach delivers lower upfront costs and better construction loan application outcomes.

What Does a Fixed Price Building Contract Need to Include?

Your contract must specify the total build cost, inclusions, stage payment amounts, and expected completion timeframe. Lenders will not approve construction funding against a cost plus contract where final expenses remain variable, because they can't assess the loan amount or confirm whether progress payments align with actual work completed.

The progress payment finance schedule in your contract should match the lender's construction draw schedule. If your builder invoices in six stages but your lender only releases in five, you'll need to negotiate alignment before signing. Most project home builders work with standard stage schedules that lenders recognise, but custom design builds may require your broker to confirm the schedule with the lender before contracts exchange.

Make sure additional payments for upgrades, variations, or materials not included in the base contract are documented in writing and submitted to your lender before the relevant stage is invoiced. If you add $15,000 in kitchen upgrades mid-build without notifying the lender, that amount won't be included in the drawdown and you'll need to cover it from your own funds at that stage.

How Do Interest-Only Repayments Work During Construction?

Most lenders offer interest-only repayment options during the construction phase, converting to principal and interest once the build reaches practical completion. You're only charged interest on the amount drawn down at each stage, so repayments increase progressively as each instalment is released.

If you've drawn $100,000 at slab stage, your monthly interest repayment might sit around $650 depending on your construction loan interest rate. Once frame stage releases another $120,000 and your total drawn is now $220,000, repayments adjust to roughly $1,400 per month. This continues until the final drawdown, at which point you're servicing the full loan amount and the loan converts to a standard principal and interest construction to permanent loan.

For ambulance officers managing repayments on shift income, this staged increase is more manageable than jumping straight to full repayments on the entire loan amount from day one. You're scaling your repayment obligation in line with the build, and if your builder runs ahead of schedule or you're earning additional shift penalties during the build period, you can make additional payments against the drawn portion without penalty on most variable construction loans.

What's the Approval Process for a Knockdown Rebuild?

You'll need council approval, a fixed price building contract, proof of builder insurance and registration, and confirmation that the finished property will meet the lender's valuation requirements. Your broker submits these alongside your income evidence, and the lender assesses serviceability based on the final loan amount, not just the land value.

Some lenders assess knockdown rebuilds as home loan refinancing with a construction component, others as a new construction loan application. The distinction affects whether you're subject to new lending criteria or existing customer refinance terms. For ambulance officers using low deposit loans or LMI waivers, this can determine whether you're required to provide a larger deposit for the construction portion or whether your existing equity and employment status cover the shortfall.

Once approved, the lender issues a formal loan offer specifying the construction draw schedule, any Progressive Payment Schedule fees, and conditions such as commencing building within a set period. You'll have a set window to satisfy conditions such as final council sign-off and insurance, then proceed to settlement on the land if you're purchasing, or drawdown commencement if you're refinancing.

When Should You Speak to a Broker About Knockdown Rebuild Finance?

Before you sign a building contract. Once the contract is signed and your deposit is paid, your financing options narrow because the builder and contract terms are locked. A broker can confirm which lenders will accept your builder, whether your contract stage schedule aligns with their drawdown process, and whether you qualify for interest-only repayments during construction before you commit.

In our experience, ambulance officers often approach brokers after they've already chosen a builder and signed preliminary agreements. That's not too late, but it limits flexibility if the builder's payment schedule doesn't match lender requirements or if the contract includes variations that need to be pre-approved. Start the conversation while you're comparing builders and before you pay a deposit, and your broker can structure the construction loan application to match your contract rather than trying to adjust the contract to fit the loan.

Call one of our team or book an appointment at a time that works for you. We'll confirm your construction loan options, structure the application around your shift income and deposit, and make sure the drawdown schedule aligns with your builder's progress payment schedule before you sign anything.

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