Knock Down Rebuild Loans: How Lenders Assess Them

Knock down rebuild loans fund a replacement home on land your client already owns, while accounting for the mortgage that remains after demolition. Lenders assess the existing debt, the value of the finished property and the client’s ability to pay through construction.

The house can disappear before the debt reduces. Arrange the loan structure and demolition funding before your client removes the property that supports the current mortgage.

What Happens to the Existing Home Loan

Demolition doesn’t cancel the existing home loan. Its repayments continue unless a new facility repays it. A knock down rebuild with an existing mortgage therefore needs an agreed structure for both the old debt and the new construction spending.

The possible structures depend on the lender’s approval:

• Refinance the current debt and arrange construction funding with the same lender. The refinancing settles the old loan, while building funds are released progressively.
• Retain the existing loan with a lender that accepts the demolition and replacement build, then add an approved construction facility.
• Use separate land and construction splits with the same lender. The land split carries existing debt, while the construction split pays for the build.

A split doesn’t remove the land as security. Nor does keeping the existing loan mean another bank will fund construction against the same property automatically.

Australia and New Zealand Banking Group (ANZ) explains the land-loan options in its construction handbook, as at October 2026. An eligible existing ANZ land loan can be renewed with added construction funds or kept separate. A land loan with another bank must be refinanced to ANZ for that arrangement.

Obtain the existing mortgagee’s approval for the proposed works and security arrangements before demolition. ANZ’s December 2023 mortgage provisions require consent before building work involving structural alteration or a building authorisation. They also restrict additional mortgages and subdivision without consent.

Land Value During Demolition

Once the house is removed, the land is the remaining security until construction adds improvements. Calculate the debt against the land-only value as well as the proposed completed value. The loan-to-value ratio (LVR) is the debt divided by the value used for that assessment.

Consider a hypothetical property worth $900,000 with a $450,000 mortgage. Its current LVR is 50%.

Assume demolition leaves land worth $600,000 and the debt stays unchanged. The debt is now 75% of the land value.

If another $30,000 is borrowed for demolition, the land-stage debt becomes $480,000, or 80% of $600,000. These are illustrative security calculations, not lender limits or an approval. The lender decides how it assesses security through each stage of the approved construction facility.

A Knock Down Rebuild Process and Checklist

Run the finance checks in order so your client knows what must be funded before the builder can draw:

1. Record the current loan balance, repayment terms and property ownership. Obtain the existing lender’s requirements for demolition and any refinance payout costs.
2. Confirm the proposed dwelling, planning permissions and intended use. Identify whether the client will live there, retain it as an investment or sell after completion.
3. Compare a rebuild with renovation or an extension using complete project budgets. Include temporary accommodation and the disruption period in both options.
4. Gather the fixed-price contract, plans and separate demolition quote. List every cost outside the building contract.
5. Obtain lender-accepted valuations and approval for the debt structure. Establish how demolition, the builder deposit and the client’s contribution will be paid.
6. Confirm the conditions for the first draw, insurance arrangements and cash available through the build. Proceed to demolition only when the approved funding sequence covers those commitments.

A renovation can fit when the existing structure can deliver the required home. A rebuild can fit when replacement better meets the client’s needs and the full budget is affordable. Compare the actual designs and quotes, because an extension can also involve structural work and temporary accommodation.

Investment Properties, Duplexes and Stamp Duty

An investment rebuild needs a budget for the period when the demolished home earns no rent. Keep anticipated rent from the completed property separate from income available during construction.

A duplex or dual occupancy also changes the security assessment. Record whether both dwellings stay on one title, whether subdivision is planned and whether either dwelling will be sold. Those facts can change the available finance route and the valuation basis.

CommBank’s construction loan page, as at October 2026, covers homes retained for residential or personal investment purposes. It excludes dwellings intended for immediate sale. A duplex planned for sale therefore needs a finance route that accepts that purpose.

Rebuilding on land the client already owns doesn’t, by itself, create a new property transfer. In New South Wales (NSW), Revenue NSW’s transfer duty guidance, updated 22 June 2026, taxes purchases and acquisitions, including changes in beneficial ownership.

Buying the site before rebuilding can attract duty. Moving ownership into a company or trust can also create a separate duty question. For another state, or an ownership change, have the conveyancer confirm the transaction with that state’s revenue office before it proceeds.

Valuation on an As-If-Complete Basis

An as-if-complete valuation estimates the market value of the land and proposed home as though the documented works were already finished. It uses market conditions at the valuation date, so it isn’t a promise about the eventual sale price.

The Australian Property Institute’s mortgage valuation guidance, effective 1 January 2025, explains this basis. Plans and costings support the assessment, and changes to the project can require the valuation to be reviewed.

Give the lender and valuer a consistent project pack:

• The fixed-price building contract and progress-payment schedule.
• Plans showing the proposed layout and any retained structures.
• Specifications and inclusions identifying the finished standard.
• Council approval or the relevant building permit, including conditions.
• The demolition quote and quotes for work outside the main contract.
• Details of proposed titles and rental use for a duplex or investment rebuild.

The demolition quote helps establish funding needs. Demolition spending doesn’t add the same amount to the completed home’s market value.

A contract price also isn’t a valuation formula. An expensive finish can cost more than local buyers pay for it. A design with limited comparable sales, unresolved approvals or incomplete outside works can affect the assessment or its conditions.

For a hypothetical finished value of $1,200,000 and total proposed debt of $900,000, the completed LVR is 75%. If the accepted valuation is $1,100,000, the same debt gives an LVR of about 81.8%. A valuation shortfall can therefore require a larger contribution, a smaller project or a revised facility.

Holding Costs and Serviceability

Budget for temporary rent and loan repayments together, then test the client’s ability to meet repayments after construction. Serviceability is the lender’s assessment of whether income covers expenses and debt repayments under its lending rules.

A separate existing loan continues to have its own repayments. Construction interest rises as further funds are drawn, so the first month’s payment doesn’t describe the later cash burden. After completion, principal-and-interest repayments can be higher again.

Build a month-by-month budget using the expected draw dates and outstanding balances. Include rent, moving and storage, rates, insurance and the existing loan payment. Show when those costs stop or change, and retain a buffer for a delayed handover.

For a hypothetical month, assume a separate existing loan costs $2,200, temporary rent costs $2,600 and $300,000 of construction funds are drawn. At an assumed annual interest rate of 6%, construction interest is approximately $1,500 that month. The combined amount is $6,300 before other living and property costs.

That calculation uses annual interest divided by 12. Actual interest depends on daily balances and loan terms. An additional three months at those unchanged amounts would require $18,900 before other costs.

Use that budget alongside the lender’s assessment of the fully drawn debt. Record which existing debts are repaid at refinance, which continue and how temporary accommodation or interrupted rent is treated. Avoid counting a repaid loan twice or treating future rental income as cash already received.

Demolition Funding and the Total Budget

Demolition needs funding before a slab-stage payment can arrive. ANZ’s construction handbook, as at October 2026, says sufficient equity can allow demolition and rebuilding costs to be borrowed. Otherwise, the client needs savings for demolition.

It also requires the client’s own contribution to be used before the initial construction draw.

Equity becomes usable only through an approved borrowing arrangement. A future progress-payment entitlement doesn’t pay a demolition invoice due today.

Record the source and availability date of funds for demolition and the builder’s deposit separately.

Knock down rebuild costs require a site-specific budget. Start with the construction contract, then add demolition, approvals and design fees, site preparation, service disconnection and reconnection, outside works and holding costs. CommBank’s building-cost guide identifies permits, demolition, drainage, earthworks and flood or bushfire requirements among the costs to allow for.

In NSW, the same budgeting method applies. Site access, asbestos removal, ground conditions and the proposed design change the quotes. A headline house price leaves the broker unable to calculate the total funding need when those items are excluded.

For example, an assumed $500,000 build, $30,000 demolition, $40,000 outside costs and $50,000 holding-cost reserve total $620,000. With an existing $450,000 debt and $120,000 cash contribution, the proposed debt is $950,000 if all other costs are financed. These are hypothetical Australian-dollar amounts, with quoted works assumed to include applicable tax.

A broker can use Bulma’s Policy Advisor to compare lender rules for the proposed construction and security arrangements. Each answer quotes the lender’s policy wording, which the broker can retain with the file notes.

Progress Draws From Demolition to Handover

Progress draws pay for the stages agreed in the approved building contract. Keep demolition funding separate unless the approved facility expressly includes a payment for that work.

Pepper Money’s construction policy, as at October 2026, lists the following five-stage schedule. It accepts up to six stages and bases draws on builder invoices and valuation inspections.

Stage	Work supporting the claim
Slab or foundation	Site preparation and the foundation work for that stage
Frame	The structural frame reaches its contracted milestone
External lining	The exterior work reaches the milestone in the contract
Fixing	The contracted internal installation work is completed
Completion	The remaining contracted work reaches completion

A lock-up milestone describes the enclosed building. The payment schedule must match the lender-approved contract, because stage labels alone don’t establish what is payable.

The builder supplies a stage invoice, and the borrower supplies the lender’s required signed payment authorisation. Inspection requirements determine when a claim can be released.

CommBank’s construction timeline, as at October 2026, requires the borrower to sign completed-stage invoices before forwarding them. It also requires the client’s own contribution first and a final inspection before the last payment.

At handover, gather the final invoice, the lender’s payment authority and required insurance or occupancy evidence. For the broader application requirements, use the construction loan requirements guide.

Variations, Delays and the Remaining Cost

A variation changes the funding calculation even when the builder can complete the revised work. Obtain the written variation and update the remaining cost before the next payment request. Submit changes that affect the approved project to the lender.

Compare undrawn loan funds plus available client cash with the unpaid contract balance and all remaining outside costs. For a hypothetical $220,000 remaining contract balance and $30,000 outside works, the remaining cost is $250,000. If undrawn funds are $200,000 and cash is $20,000, the funding gap is $30,000.

Paying an extra invoice from the loan doesn’t remove that gap. Arrange additional approved funds or an agreed project change before spending money required to finish. A lender can require updated valuations or evidence of funds to complete when the approved project changes.

How long a knock down rebuild takes depends on approvals, demolition and the builder’s programme. The loan deadline is a separate limit. ANZ’s construction handbook, as at October 2026, requires the first drawdown request within six months of the signed offer and completion within 24 months of first drawdown.

Pepper Money’s policy requires completion within 18 months of the initial drawdown. Use the deadline for the selected facility, then test a delayed handover against the cash reserve. Raise a likely deadline breach with the lender early enough to agree the available options.

The file is ready for demolition when the lender has approved the structure and works, early invoices have a funded payment route and the remaining budget can finish the home.