Knockdown Rebuild Loans

A knockdown rebuild involves demolishing an existing dwelling and constructing a new home in its place. It’s increasingly popular in Australia as a way to get a brand-new home on an established block — preserving a valued location, school zone, or existing land holding without paying the premium for a brand-new house-and-land package in a greenfield estate.

Financing a knockdown rebuild is more complex than a standard home purchase or renovation loan. This guide explains how construction finance works for knockdown rebuild projects, the stages involved, and what to expect from the 8 to 14 month typical timeline. Related guides: construction loans, home loans, and borrowing power.

Construction Loan vs Standard Home Loan

A knockdown rebuild cannot be financed with a standard (term) home loan. Because the security (the finished dwelling) doesn’t exist at the start of the project, lenders use a construction loan — a specially structured facility that:

Draws down funds progressively as construction stages are completed (not as a lump sum)
Charges interest-only on the portion drawn at any given time (reducing interest costs during the build)
Converts to a standard principal-and-interest loan once construction is complete and the occupation certificate is issued

The key distinction from a standard loan is that you are not borrowing against an existing asset — you are borrowing against what the property will be worth once complete. The lender orders an “as-if-complete” valuation at the start, which estimates the finished property’s market value and determines the maximum loan available.

Progress Draw-Down Payments

Construction loans fund the build in progress payments — instalments tied to completion of specific construction stages. You (or your broker) submit a progress claim to the lender after each stage is certified complete. The lender may send a valuer or inspector to confirm the work is done before releasing funds to your builder.

The six standard progress payment stages and typical percentage allocations are:

Demolition and site preparation: 5–10% — demolition of existing structure, site clearing, and preparation for new foundations
Slab / Base: 15–25% — footings, sub-floor structure, and concrete slab poured
Frame: 15–20% — wall and roof framing erected and inspected
Lock-up (external): 20–25% — external walls, roof covering, windows, and external doors installed
Fit-out (fixing): 20–25% — internal fit-out including plasterboard, cabinetry, fixtures, and services rough-in
Completion (practical completion): 10–15% — final fittings, landscaping, and occupation certificate

Exact percentages are set by your building contract (typically a HIA or MBA standard contract) and must match the lender’s draw-down schedule. Mismatches cause delays — review these before signing the building contract.

Council Approval Process

Before a lender will issue a construction loan for a knockdown rebuild, you must have (or be in the process of obtaining) council approval. The approval process varies by council and project type:

Development Application (DA): Required for most knockdown rebuilds involving non-standard designs, properties in heritage overlay areas, or builds that exceed standard height or setback controls. DAs take 40–120 days in most NSW, Victorian, and Queensland councils.
Complying Development Certificate (CDC): A faster approval pathway for projects that meet prescribed development standards — including standard height, setback, and floor plate ratios. CDCs can be issued by a private certifier in as little as 10–20 business days.

Your architect or builder can advise which pathway applies. Note: some heritage-listed properties cannot be knocked down — always confirm with the council before purchasing or committing to a knockdown project.

Owner-Builder vs Registered Builder

The great majority of lenders will only fund construction loans where a licensed, registered builder holds the contract. Using an owner-builder arrangement — where you manage the build yourself — severely restricts your lender options (most major banks decline owner-builder applications) and may affect your ability to get home warranty insurance, which is required in most states for new builds over $20,000.

A registered builder must hold appropriate licences and provide:

A fixed-price building contract (lenders require a fixed-price contract to manage cost blow-out risk)
Home Indemnity Insurance (Builders Warranty Insurance) — required in NSW, VIC, QLD, WA, and SA for residential construction over $20,000
A construction programme showing key milestones and an estimated completion date

Typical Costs in a Knockdown Rebuild

Budgeting accurately for a knockdown rebuild requires accounting for costs beyond the build price itself:

Demolition: $15,000–$40,000 depending on the size and materials (asbestos removal adds significant cost)
Site costs: $15,000–$60,000 for clearing, levelling, retaining walls, and soil tests
Council fees and contributions: Development application fees plus infrastructure contributions — typically $5,000–$30,000
Construction cost: $1,800–$3,500+ per square metre depending on design, location, and specification
Architect/building designer: $15,000–$60,000 for design and documentation
Lender fees: Construction loan establishment fees, progress inspection fees ($200–$400 per inspection × 6 stages)
Contingency: Allow 10–15% over your base build cost for unexpected costs — particularly important for demolition discoveries (sub-floor issues, contaminated soil)

Timeline: What to Expect

A realistic knockdown rebuild timeline from purchase or decision to move-in typically spans 8 to 14 months:

Design and DA/CDC approval: 2–4 months
Construction loan approval: 3–6 weeks (alongside design phase)
Demolition: 2–4 weeks
Construction: 5–9 months (depending on project size and builder efficiency)
Occupation certificate and handover: 2–4 weeks after practical completion

Frequently Asked Questions

Can I live in the existing house while the loan is processed?

Yes — until you execute the demolition, you remain in possession of the existing dwelling. However, your insurance obligations change the moment you notify your insurer of the intended demolition. Plan your accommodation for the construction period carefully: renting during an 8–12 month build adds $20,000–$50,000+ to your total project cost in most Australian capital cities.

What happens if construction goes over budget?

If you have a fixed-price building contract with a reputable registered builder, cost overruns are the builder’s responsibility (within the variations provisions of the contract). However, if you approve variations or if unforeseen site conditions arise, additional costs are your responsibility. This is why a 10–15% contingency budget is essential, and why your construction loan should include a small buffer above your contract price.

How is the loan interest calculated during construction?

Interest is calculated daily on the drawn-down balance only. If your loan limit is $900,000 but you’ve only drawn $250,000 (after the slab stage), you pay interest on $250,000 — not $900,000. This significantly reduces your interest cost during construction compared with borrowing the full amount upfront.

Can I use equity in the existing home to fund the knockdown rebuild?

If you own the land debt-free (or with modest debt), the land value serves as security for the construction loan. If you have an existing mortgage, the lender will fold both the existing loan and construction loan into a single construction facility. Your borrowing power must support the total peak debt (land loan + construction cost).

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About the Author
Victor Lagos is a licensed mortgage broker (ACL 546774) and founder of Lagos Financial, with close to 20 years of finance industry experience since beginning his career at Bluestone Mortgages in 2006. A member of the Finance Brokers Association of Australia (FBAA) since 2015 and the Australian Financial Complaints Authority (AFCA — 98399), Victor helps Australians build wealth through tailored home loan and property investment strategies, working with 60+ lenders nationwide. Last reviewed: March 2026.

Knockdown Rebuild Loans | Finance Your Demolish and Build