A construction loan is paid out in stages as the build progresses, typically for the deposit, foundations or floor, framing, closing in, and completion. The lender usually checks each stage before releasing funds.
You pay interest only on what has been drawn, so interest is low early in the build and grows as more is paid out. Some lenders add the interest to the loan during construction; others ask you to pay it monthly.
Lenders value the finished home based on the plans and a fixed-price contract. Once the build is complete and the council issues the code compliance certificate, the loan moves to normal repayments on the structure you choose.
A builder's guarantee, such as those offered through Master Builders or Certified Builders, protects you if the builder can't finish the job. Many lenders ask for one.