Construction Loans in NZ: How Progress Payments Work

How a construction loan differs from a standard mortgage

With a standard purchase, the lender pays the full price on settlement day and your loan starts in full. A construction loan works differently: the lender approves the total amount at the start, but releases it in stages as the build reaches agreed milestones. Each stage is called a progress payment or drawdown.

This protects both you and the lender — money only goes out for work that has actually been done, and the lender's security (the partly built house) grows as the loan does.

A typical drawdown schedule

Every builder's contract sets its own payment schedule, and lenders match drawdowns to it. A common pattern looks like this:

Your own deposit is usually used first, then the lender's funds. Keep a buffer for variations — changes you make during the build that weren't in the original contract.

Fixed-price contracts make finance easier

Lenders are much more comfortable with a fixed-price contract from an established builder than with a cost-plus or labour-only arrangement, because the total cost is known at the start. Cost-plus and owner-builder projects can still be financed, but with fewer lenders and usually a larger contingency requirement.

• Under the Building Act, residential building work costing $30,000 or more (including GST) must have a written contract, and the builder must give you a disclosure statement and checklist before you sign.
• Check whether the builder offers a build guarantee, and what it covers if the builder can't finish.
• Make sure the contract's payment schedule doesn't ask for money ahead of the work done. Lenders often won't advance funds before the matching stage is complete.

MBIE's building.govt.nz has plain-English guidance on contracts and your rights as a homeowner.

Deposits and the new-build exemption

Under the Reserve Bank's LVR settings, lending on new builds is exempt from the low-deposit speed limits that apply to existing homes. That exemption is why building or buying off the plans can be a lower-deposit route into home ownership, particularly for first home buyers.

Being exempt from the speed limit doesn't mean every lender offers low-deposit construction lending, or offers it on the same terms. Each lender sets its own policy on deposit, builder type and contract type. See what LVR means for your deposit and the Reserve Bank's LVR page for the current settings.

House-and-land packages vs building on your own land

• House-and-land package: you buy a section and sign a build contract with the developer's builder, often together. Settlement on the land may happen at title, with the build starting afterwards. Be clear on when each payment is due.
• Your own land: if you already own the section, its equity can count towards your deposit. If the land is still being paid off, the land loan and construction loan are usually combined.
• Turnkey: the builder funds the build and you pay most of the price on completion. This is closer to a standard purchase, but check what deposit is held and how it's protected.

Comparing options? Our guide to building vs buying in NZ and buying off the plans covers the trade-offs.

How we help

Construction lending is where lender policy differs most — on contract type, builder, deposit and how drawdowns are managed. We match your build to lenders whose policy fits it, sort out the drawdown schedule with your builder before you sign, and manage each progress payment so the build isn't held up by paperwork.

More on the service: construction loans.

This article explains how New Zealand lenders generally assess these situations. It is general information, not personalised financial advice, and lender policy changes often — check your own position with a registered adviser. Official sources: Reserve Bank of New Zealand for lending policy and the OCR, and Sorted.org.nz for independent government-backed money guidance.