Most people know the drill when buying an established house. You save a deposit. You get a mortgage pre-approval. You attend an auction or make an offer. You get the keys and move in.
Building a custom home is different. It requires a completely different financial mindset. You are not buying a finished product. You are funding a manufacturing process that happens on your land.
If you approach a custom builder with a standard “real estate” mindset, you will likely face frustration. You might wonder why you need cash for soil tests before you even have a contract. You might worry about banks valuing your plans lower than the build cost. You might fear the horror stories of invoices spiralling out of control.
Understanding finance is the first step in building a custom home in Ballarat.
We are Tye and Daniel, owners of Murphy James Builders. We are not financial advisors. We do not wear suits. But we build homes in Ballarat and Daylesford every day. We see exactly where clients get stuck with their lending.
This guide explains the mechanics of construction loans. It covers the “Cash Gap” you must bridge yourself. It explains how our fixed-price process protects your budget. And it tells you the truth about where your money actually goes.
How is a construction loan different from a regular mortgage?
A standard home loan gives you a lump sum of money to buy a house that already exists. The bank hands over the cheque at settlement, and the debt is yours.
A construction loan works differently. Think of it more like a line of credit or a credit card limit. The bank approves you for a total limit—let’s say $800,000—based on the fixed-price contract you sign with us.
But they do not give you (or us) $800,000 on day one. They keep the money in their vault.
They release funds to us, the builder, only when we prove we have completed specific stages of work on your site. These controlled releases of cash are called drawdowns or progress payments.
The Interest-Only Benefit
There is a major cash flow advantage here for you. You generally only pay interest on the amount drawn down, not the full loan limit.
If we have only completed the concrete slab, and the bank has paid us $80,000, you only pay interest on that $80,000. You do not pay interest on the remaining $720,000 until the house is finished.
This structure helps you manage your household budget. We know that many of our clients are paying rent or another mortgage while they build. The lower repayments at the start of the build help ease that pressure.
The “Subject to” Conditions
Banks are conservative. They will not approve a construction loan based on a rough sketch on a napkin. They need certainty. To get unconditional approval for a construction loan, you typically need three things:
- A signed Fixed Price Building Contract (usually an HIA contract).
- Council-approved plans and specifications.
- A copy of the builder’s insurance policy (Domestic Building Insurance).
This creates a “chicken and egg” problem. You need a contract to get the loan. But you need to do a lot of work (and spend some money) to get the contract. This leads us to the most common financial stumbling block: upfront costs.
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What upfront costs of building a house must I pay in cash?
Many homeowners assume the bank pays for everything from the very first meeting. This is incorrect.
To give you a Fixed Price Contract, we need detailed information. We need to know what is under the ground (soil tests). We need to know exactly how much steel is in the slab (engineering). We need to know if you want porcelain tiles or timber floors (specifications).
We cannot guess these things. Guessing leads to budget blowouts. We must investigate them.
This investigation phase is called the Preliminary Agreement or Pre-Construction Phase. The bank rarely funds this part. You must pay for these items from your own savings before your loan is formally approved.
We call this the “Cash Gap.”
If you approach us with zero savings and expect the bank to cover the deposit, soil tests, and architect fees from day one, we likely cannot help you. You are not financially ready to build yet.
The Pre-Build Cash List: Who Pays for What?
You generally need approximately 5% to 10% of your total project budget in liquid cash (savings) to get to the starting line. Here is where that money goes.
Item | Approximate Cost | Who Pays? |
Soil & Geotechnical Reports | $800 – $1,500 | You (Cash) |
Feature Survey (Land Levels) | $1,000 – $2,000 | You (Cash) |
Concept Design & Drafting | $3,000 – $10,000+ | You (Cash) |
Structural Engineering | $2,000 – $5,000 | You (Cash) |
Energy Rating Assessment | $400 – $800 | You (Cash) |
Building Permit Fees | Varies | You (Cash) |
Build Contract Deposit (5%) | 5% of Build Cost | You (Cash) |
Construction Stages | 95% of Build Cost | Bank Loan |
Paying for soil tests and engineering out of pocket feels painful. It is spending money on paperwork. But it is the only way to get a fixed price.
If a builder gives you a quote without doing a soil test or engineering check, they are guessing. When they find rock later, they will charge you thousands of dollars extra. We do not work that way. We spend your cash upfront to investigate the site thoroughly, protecting your loan and your wallet later.
For a deeper explanation of these specific costs, read our breakdown on custom home planning costs in Ballarat.
Why do banks sometimes value custom plans lower than the build cost?
This is the “Design Trap.” It is one of the most frustrating parts of custom building. It usually happens when a client spends $15,000 with an architect to design a dream home without first consulting a builder.
The architect draws a beautiful, high-spec home. The builder quotes it at $1.5 million. The client is happy with the design and the price. They take the contract to the bank.
The bank instructs a valuer to perform an On-Completion Valuation. The valuer looks at the plans. They look at the land. They look at recent sales in the suburb.
The valuer might report back: “This is a nice house. But the most expensive house ever sold on this street was $1.1 million. We value this project at $1.1 million.”
The Valuation Shortfall
The build cost is $1.5 million. The bank valuation is $1.1 million.
The bank will usually lend based on the lower number (the valuation). You are now $400,000 short. You must pay that $400,000 in cash, or you cannot build the house.
This happens frequently in custom home building. It is a risk in areas like Daylesford or premium Ballarat suburbs (like Lake Wendouree or Black Hill) where build quality often exceeds historical sales data.
Take our St Aidens project in Lake Wendouree as an example. Projects of this calibre involve intricate details, heritage considerations, and high-specification finishes. If a design like this is not managed correctly from the start, a generic bank valuation might miss the nuance of the quality, leading to a shortfall.
How We Prevent This (Concept Pricing)
Banks finance the market value of your home, not the cost to build it. They do not care about your emotional attachment to the design; they care about their risk.
We solve this with Concept Pricing. We encourage you to bring us into the conversation early—ideally when you just have a concept sketch. Do not wait until you have paid for full engineering and working drawings.
Bring us the sketch. We will give you a realistic price guide. We can tell you if your vision aligns with property values in your specific suburb. If the design is over-capitalised (meaning it costs more to build than it’s worth), we tell you immediately. We adjust the design before you spend money on engineering.
We prefer to have the hard conversation about budget at the start, not the end. You can learn more about how we manage this in our guide to custom home construction costs.
How do construction loan progress payments work in Victoria?
New clients often fear being ripped off. They worry the builder will take their money and not finish the work. Or they fear a final invoice that is three times higher than the quote.
Construction finance actually protects you from this.
Unlike a renovation where a builder might ask for cash whenever they need to buy materials, a new build follows a regulated Progress Payment Schedule. This is defined in the HIA (Housing Industry Association) contract.
The bank acts as your auditor. When we send an invoice for the Frame Stage, we do not just send it to you. We send it to the bank. The bank often sends a valuer to the site to inspect the work. If the frame is not finished, they do not pay.
This means you never pay for work that is not there.
The Standard HIA Progress Stages
Here is the typical breakdown for a custom home in Victoria. Percentages may vary slightly depending on your specific contract, but this is the industry standard.
- Deposit (5%)
This secures your slot in our schedule. We use this to pay for insurance (DBI), permit administration, and project setup. - Base Stage (10%)
The site is cut and leveled. The plumbing is in the ground. The concrete slab is poured. If your home is on stumps, the stumps, bearers, and joists are installed. - Frame Stage (15%)
The skeleton of the house is up. Wall frames are in place. Roof trusses are installed. You can walk through the rooms and see the actual shape of your home. - Lock-Up Stage (35%)
This is a massive milestone. The roof is on. The brickwork or external cladding is done. Windows and external doors are in. The house is weather-tight. - Fixing Stage (25%)
We work inside. Plaster is hung. Internal doors are fitted. Architraves and skirting boards are installed. Kitchen and bathroom cabinetry is placed. - Practical Completion (10%)
Painting is done. Tiling is finished. Plumbing fit-offs (taps, toilets) are installed. The house is cleaned. You get the keys.
You can verify these standard stages and your rights as a consumer in the Consumer Affairs Victoria building and renovating guide, which outlines the protections in place for you.
At Murphy James Builders, we take this accountability further. We back our schedule with a Timeline Guarantee. If we run over the agreed completion date (and it’s not due to weather or things out of our control), we pay you $50 for every day we are late. This is written in our 6-Point Guarantee.
What are 'Provisional Sums' and why do they matter?
You might get three quotes for your custom home. One might be $50,000 cheaper than the others. Before you sign, check the Prime Cost (PC) and Provisional Sum (PS) items.
A Prime Cost is an allowance for an item you haven’t selected yet. For example, a builder might include a $50 allowance per tap to complete the quote.
The quote looks cheap. But when you go to the showroom, you find that a decent quality tap costs $250. You must pay the additional $200 per tap. Multiply this by the number of towel rails, sinks, and handles in the house. The “cheap” quote suddenly becomes the expensive one.
A Provisional Sum is an allowance for work where the scope is unknown. The most common one is rock excavation. A builder might allow $2,000 for rock removal. If they hit solid granite, the cost might range up to $15,000. You pay the difference.
The Murphy James Approach
We dislike surprises. We want the price on the contract to be the price you pay.
We work hard to eliminate Prime Costs and Provisional Sums. We ask you to select your tiles, taps, and bricks before you sign the contract. We conduct thorough geotechnical testing to understand the site conditions.
This creates a true Fixed Price. It gives you certainty. It also helps with financing. Banks generally hate lending extra money for blowouts. They want to know the final figure upfront.
Our 605-point quality assurance checklist ensures we catch details early in the quoting phase, rather than billing you for them later. You can read more about how we manage these details on our Custom Homes service page.
Can I finance 'variations' or changes mid-build?
This is the golden rule of financing custom home construction:
Variations are Cash.
Banks approve a loan based on the contract you signed. They are very reluctant to increase that loan halfway through the build. It requires new paperwork, new valuations, and delays.
If you decide at Lock-Up stage that you want to upgrade from standard cornices to square-set plaster, that is a Variation.
We will quote the extra cost. If you accept it, you will receive an invoice. You must pay this invoice immediately from your own funds. You usually cannot add it to the end of the loan.
Changing your mind on a PDF plan is free. Changing your mind on a construction site is expensive.
This is why we spend so much time in the planning phase. We want you to be 100% happy with the design before we pour the slab. It protects your bank balance and keeps the project moving.
Should I use a specialist construction broker?
You wouldn’t ask a plumber to wire your house. You shouldn’t ask a standard bank teller to structure a complex custom home loan.
Construction finance is a niche. It involves progress payments, valuer inspections, and strict timelines. Retail bank branches often struggle with the details of HIA contracts.
We strongly recommend using a mortgage broker who specialises in construction finance. They know the language. They know how to present a “build package” to a valuer to get the best result.
This is especially important in regional areas like Ballarat and Daylesford. A local broker understands that a custom home in Black Hill is different from a volume build in a new estate. They can argue your case to the valuer to ensure you get the finance you need.
Frequently Asked Questions About Construction Finance
Yes. If you own your block of land outright or have significant equity in it, most banks will accept this as your security for the construction loan. This often means you do not need to contribute cash towards the build contract itself. However, remember the “Cash Gap”—you still need liquid cash for the preliminary costs (soil tests, plans) before the loan is approved.
Usually, no. Banks lend against the house, not the garden. Unless you explicitly include “hard landscaping” (like retaining walls or concrete driveways) in the fixed-price building contract, the bank views them as non-structural. You should budget separate savings for fencing, planting, and letterboxes.
If you sign a Fixed Price Contract with Murphy James Builders, the price for the original scope is locked in. We take the risk of material price rises for timber or concrete. You only pay extra if you change the design or scope (a Variation).
Once you have a signed contract and approved plans, formal approval typically takes 14 to 21 days. However, valuations can cause delays. We recommend allowing 30 days in your “Subject to Finance” clause to be safe.
We take our schedule seriously. Our 6-Point Guarantee includes a Timeline Guarantee. If we run over the agreed completion date (and it’s not due to weather or things out of our control), we pay you $50 for every day we are late. This pays for your inconvenience. We have a financial incentive to finish your home on time.
Conclusion
Financing a custom home feels complex because it is strict. But that strictness is your safety net.
The bank’s rules prevent you from overspending on a design that holds no value. The progress payments ensure you only pay for completed work. The upfront costs ensure the project is viable before you dig a hole.
Don’t let the “Cash Gap” or a low valuation surprise you six months into the process. The most expensive mistake isn’t the builder’s fee; it’s paying for a design you can’t finance.
Stop guessing if your budget matches your vision. Validate your financial readiness and get a clear picture of the road ahead. Contact us today to book a consultation. We will give you straight answers about what your build will actually cost.