In New Zealand, because you already own the land and have chosen a builder, you would typically look at a construction loan (also called a build mortgage). The key difference from buying an existing house is that the bank releases the money in stages as your home is built, rather than lending the full amount at settlement.

The good news is that you generally don't need to pay the builder out of your own pocket and then wait to be reimbursed. Your bank can pay the builder directly from your approved construction loan, subject to its lending conditions and the required paperwork.

1. How a build mortgage works

Step 1 — Get your construction loan approved

The bank assesses your income, expenses, existing land ownership, deposit or equity, building contract, plans and total project cost. It approves a maximum amount for the build.

Step 2 — The builder starts work

Your building contract sets out payment milestones, such as foundations, framing, roofing and interior work. The bank checks that the payment arrangements fit its lending approval.

Step 3 — The bank releases funds in stages

When a milestone is reached, the builder issues a progress payment claim. You submit it to the bank with any required invoices, inspection reports or other evidence. The bank releases the approved amount, often directly to the builder or their nominated account.

Step 4 — The build is completed

The final payment is made once the contract's completion requirements and the bank's conditions are satisfied. Your lending then continues as a normal home loan, although the bank may already have converted it to its standard repayment arrangements.

The exact process varies by lender and building contract. In particular, some banks require a valuation or inspection before releasing certain payments.

2. A worked example: how the money flows

Imagine your land is already paid off and your build contract is $600,000. Your bank approves a $500,000 construction loan, and you fund the remaining $100,000 from your own savings or equity, subject to the bank's requirements.

Here's an illustrative payment schedule:

Build stage	Builder's payment	Cumulative loan drawn*
Deposit / initial payment	$30,000	$30,000
Foundations complete	$70,000	$100,000
Framing and roof	$120,000	$220,000
Exterior enclosed	$120,000	$340,000
Interior fit-out	$160,000	$500,000
Completion and final payment	$100,000	$600,000 total build cost

*Illustration only. This assumes the first $500,000 of payments are funded by the loan and the final $100,000 by you. Actual drawdowns depend on the contract, your contribution and your bank's rules.

Because you own the land, its value may count as equity towards the project. That can reduce how much additional cash you need to contribute, although the bank will assess the land value, any existing mortgage and the overall project costs.

3. What happens to your mortgage repayments during the build?

This is one of the most useful features of a construction loan.

Many New Zealand banks allow you to draw the loan progressively and pay interest only on the amount you've actually borrowed. Principal repayments generally begin once the build is complete, depending on your loan terms. BNZ describes this approach in its guide to building a house. Construction loans - Buying land and building a houseHow to borrow to build a brand-new home

For example, if your approved loan is $500,000 but you've only drawn $100,000 so far, interest is generally charged on that $100,000, not the full $500,000.

Here's how the interest might grow as the build progresses, using an illustrative interest rate of 6% per year:

Amount drawn down

$100,000

$0

$250k

$500k

$0

$250k

$500k

$0

$250k

$500k

Illustrative annual interest rate

6.0%

4%

6%

9%

4%

6%

9%

4%

6%

9%

Estimated interest per month

$500

Estimated interest per year

$6,000

Approximate interest only, assuming the balance and rate remain unchanged. Excludes fees and other costs.

One important consideration: if you're also renting while the house is being built, you may have to pay rent and construction-loan interest at the same time. It's worth budgeting for that overlap.

4. What you need to organise before the build starts

In New Zealand, I would focus on these five things before signing off on the financing.

• Get the construction loan approved before committing to payment dates. Give the bank your building contract, plans, specifications, consent information and cost breakdown. Ask whether approval covers the entire project, including site works and contingencies.
• Check the payment schedule against the bank's drawdown process. If the builder requires a deposit or an early payment, confirm that the bank will release funds at that point. Some banks have restrictions on deposits or advance payments.
• Allow for cost overruns. A fixed-price contract can still have exclusions, provisional sums and variations. Keep a contingency fund for unexpected costs, upgrades and work not covered by the contract. How to borrow to build a brand-new homeApplying for a loan to build
• Arrange the required insurance. Ask the bank and builder who is responsible for contract works insurance and when cover must begin.
• Have your lawyer review the contract and loan documents. Your building contract should clearly set out progress payments, deadlines, variations and what happens if there are delays. For residential building work of $30,000 or more including GST, a written contract and prescribed consumer information requirements apply. Contracts for your building projectImplied contract terms

You can read the official Building Performance guide to building contracts for more detail.

5. The key question: how much equity do you have in your land?

Since you already own the section, this is likely to be a major part of how your bank structures the loan.

For example, if your land is worth $400,000 and your proposed build costs $600,000, the total project value and total project cost will be assessed together. The bank will consider your existing land equity, your income, the expected completed property value and any debt secured against the land. The land's value is not automatically equivalent to cash available to pay the builder.

One detail would help me explain how this would work for your circumstances: have you paid off the land completely, or is there already a mortgage on it?

That makes a significant difference to how the bank might structure your construction loan and how much additional borrowing you may need.