Land Loan vs Construction Loan: What’s the Difference?
Building a new home is a major milestone, but financing it can seem complicated, especially when you hear terms like land loan and construction loan. While both are designed to help you fund different parts of your property journey, they serve distinct purposes and operate in different ways. Understanding the difference between the two can help you make informed decisions and plan your build more effectively.
What Is a Land Loan?
A land loan (sometimes called a vacant land loan) is used when you’re purchasing a block of land with no immediate plans to build. This type of loan gives you the flexibility to secure your preferred lot, for example, in a new development or rural area, even if construction will happen later.
How It Works
- The loan is typically secured against the land itself.
- You’ll make regular repayments on the borrowed amount, just as you would with a standard home loan.
- Interest rates and deposit requirements can vary depending on the lender, loan size, and location of the land.
Land loans are ideal if you want to buy land now and take time to design, plan, or save before building.
What Is a Construction Loan?
A construction loan is used to fund the building of a new home (or major renovation). Unlike a standard home loan, the funds are released in progressive stages, known as drawdowns, as each phase of construction is completed.
Typical Drawdown Stages
- Slab or base stage – when the foundation is laid
- Frame stage – when the structure or framework is completed
- Lock-up stage – when external walls, doors, and windows are installed
- Fit-out stage – for internal work such as flooring, cabinetry, and plumbing
- Completion stage – final inspection and finishing touches
You only pay interest on the amount drawn down at each stage, not the full loan amount from the start. Once construction is complete, the loan generally converts to a standard home loan with regular repayments.
Key Differences Between a Land Loan and Construction Loan
The main difference between a land loan and a construction loan comes down to purpose, timing, and how the funds are released. A land loan is used purely to purchase vacant land, and the entire loan amount is paid to the seller at settlement just like a standard home loan. Repayments then begin on the full amount straight away.
A construction loan, on the other hand, is designed specifically for building and is released in progressive drawdowns as each stage of the build is completed, such as the slab, frame, lock-up, and final fit-out. With a construction loan, you generally only pay interest on the funds already drawn, which can help manage cash flow during the build.
Land loans are best suited to buyers who want to secure a block now and build later, whereas construction loans are ideal for those ready to begin building soon after purchase. Both loan types have different assessment criteria, repayment structures, and documentation requirements.
When to Consider Each Option
You might consider a land loan if:
- You’ve found the perfect block but aren’t ready to build; or
- You’re still finalising house plans or saving for construction costs.
You might consider a construction loan if:
- You’ve chosen a builder and are ready to start construction; or
- You want a tailored repayment structure that aligns with your build schedule.
Neither loan type is inherently “better”, it simply depends on your goals, timing, and financial position.
Land and construction loans are both valuable tools for building your dream home, but they’re designed for different stages of the process. Knowing which one you need (and when) can help you plan confidently and avoid unnecessary delays or surprises. Before proceeding with any finance application, make sure you seek independent, licensed advice and confirm that the loan structure aligns with your goals and financial situation. Learn how each loan works with BrokerCo’s general guidance for home builders.