Knock Down Rebuild Finance: Complete Australian Guide
Last updated: 11 May 2026 · Reading time: 8 minutes
To finance a knock down rebuild in Australia, you take out a construction loan secured against your existing land. The lender pays your builder in progressive drawdowns at set construction stages, you make interest-only repayments during the build, and the facility converts to a standard principal-and-interest home loan once the new home is complete.
What is a knock down rebuild loan?
A knock down rebuild (KDR) loan is a construction loan secured against your existing property that funds the demolition of your current home and the building of a new one on the same land. It is structurally a construction facility, not a standard home loan, because money is released in stages as the build progresses rather than as one lump sum at settlement.
The Australian Bureau of Statistics records that 19.2% of all new residential dwellings approved across Australia between July 2019 and June 2025 were knock-down rebuilds — about 35,914 dwellings every year — making KDR one of the most active segments of the residential construction market (ABS, Approvals of Knock-Down Rebuilds).
KDR finance differs from the two products it is most often confused with:
- A standard home loan funds a purchase or refinance of an existing dwelling. It pays out in a single drawdown at settlement and you make principal-and-interest repayments immediately.
- A pure construction loan funds a new build on vacant land you already own or are buying. There is no existing house to demolish, so there is no demolition stage or extra valuation step.
- A KDR loan is a construction loan plus a demolition stage. The lender values the land “as if vacant” and assesses the cost-to-complete based on a fixed-price building contract, then funds the project in tranches.
Because the security is your existing land plus the proposed new dwelling, lenders need to see the same evidence as for a new build — fixed-price contract, council-approved plans, builder details, and insurance — plus a demolition quote.
How the Knock Down Rebuild Finance Process works
Step 1: Valuation of your existing property
The lender orders a valuation of your current land and dwelling. For a KDR they usually instruct two valuations: the as-is value of the land plus the existing house, and the on-completion value once the new home is built. The LVR is generally calculated against the on-completion figure, which is what protects your borrowing capacity — but the as-is valuation still matters if you are refinancing an existing mortgage into the construction facility.
Step 2: Demolition costing (and whether it’s financed)
You obtain quotes from licensed demolition contractors. Demolition costs can be included in a KDR construction loan, provided the demolition contract is from a licensed contractor, the cost is itemised, and total project costs sit within your approved facility limit. Across Australia, demolition currently ranges from $12,000 to $50,000 depending on size, materials and site access, with the national average around $17,000 (Yellow Pages industry data, 2026). Asbestos in homes built before 1990 typically adds $2,500–$15,000+.
Step 3: Fixed-price building contract
Lenders almost universally require a fixed-price, lump-sum building contract from a licensed builder. The contract must include the full scope of works, inclusions, site costs, council approvals, and a clear progress-payment schedule. Cost-plus contracts and owner-builder arrangements are accepted by only a small subset of lenders and at lower LVRs (typically 60–70%).
Step 4: Construction loan structure (progressive drawdowns)
Your KDR construction loan is divided into stages — usually slab, frame, lock-up, fixing, and practical completion. The lender releases funds only after each stage is independently certified as complete, paying the builder directly. This protects you from paying for work that has not been done. Most lenders will fund up to 90–95% of the on-completion valuation; LVRs above 80% generally attract Lenders Mortgage Insurance (LMI) unless a professional LMI waiver applies.
Step 5: Interest-only repayments during the build
Throughout construction, you pay interest only on the amount drawn so far, not the full approved facility. This keeps cash flow manageable while you may also be paying rent for temporary accommodation. ANZ, for example, allows 24 months from the first drawdown to complete a build under its construction-loan terms (ANZ Construction Loans). Most major lenders apply similar build-window rules.
Step 6: Conversion to a standard home loan at completion
When the builder issues a certificate of practical completion and the final inspection passes, the loan automatically converts to a standard principal-and-interest home loan, usually on the variable rate you selected up-front (with the option to fix or split). At this point, the full facility is drawn and your repayments increase.
Knock down rebuild price guide (Australia 2026)
Note: A typical knock down rebuild in 2026 costs $400,000–$1.1 million all-in. Demolition adds $12,000–$50,000, while new-build construction averages $1,800–$3,500 per square metre for project homes and $3,500–$5,500+ per square metre for custom and premium builds. Sydney and Melbourne sit 10–20% above the national average.
The ABS reports that the average approval value for a detached house built as part of a KDR project reached $729,121 in 2024–25 — more than double the $355,478 average for non-KDR detached houses, reflecting the larger and higher-spec rebuilds typical in established suburbs (ABS, 2025).
Typical demolition costs by state (single-storey detached home)
| State / City | Typical demolition range | What drives the difference |
|---|---|---|
| Sydney (NSW) | $20,000 – $30,000 | Tight access, higher tipping fees, strict EPA waste rules |
| Melbourne (VIC) | $15,000 – $20,000 | Easier access in outer suburbs; pre-1990 homes often need asbestos removal |
| Brisbane (QLD) | $12,000 – $40,000 | Wide range driven by Queenslander-style timber homes vs slab-on-ground |
| Perth (WA) | $14,000 – $22,000 | Relatively flat sites, fewer heritage overlays |
| Adelaide (SA) | $12,000 – $20,000 | Lower disposal costs, fewer state demolition permits required since March 2021 |
| Hobart (TAS) | $15,000 – $25,000 | Smaller market, higher transport costs |
| Canberra (ACT) | $18,000 – $28,000 | High labour rates; mostly one-for-one KDRs |
Sources: industry pricing data published Jan–Mar 2026 by ServiceSeeking, Yellow Pages and licensed demolition contractors. Add $2,500–$15,000+ for asbestos if your home was built before 1990.
Typical new-build construction cost per square metre (2026)
| Build type | Cost per m² | Example: 200 m² home |
|---|---|---|
| Basic project home (regional) | $1,500 – $2,200 | $300,000 – $440,000 |
| Standard project home (metro) | $2,200 – $3,200 | $440,000 – $640,000 |
| Mid-range custom build | $3,200 – $4,500 | $640,000 – $900,000 |
| Premium / architecturally designed | $4,500 – $7,000+ | $900,000 – $1.4M+ |
Sources: BMT Tax Depreciation Construction Cost Table; Rider Levett Bucknall Riders Digest 2026 (Sydney and Melbourne).
Total project budget — what to expect all-in
Adding demolition, professional fees, site costs, council fees, and a 10–15% contingency, a typical metro KDR project for a 200 m² four-bedroom home sits between $500,000 and $900,000, with premium inner-city rebuilds easily passing $1.2 million.
Financing a knock down rebuild when you already have a mortgage
When you have an existing mortgage on the property you want to demolish, your broker will usually structure the deal as a refinance into a construction loan. The new facility has two components:
- The cost to clear the existing mortgage balance.
- The cost to demolish and rebuild, including the building contract, demolition contract, council fees and contingency.
Both components draw against the on-completion valuation of the new home. Provided that valuation supports an LVR of 80% or less, the deal is straightforward. Above 80%, you will generally need LMI, a professional LMI waiver (available to doctors, lawyers, accountants and other listed occupations), or a guarantor arrangement.
What happens during the demolition gap
Between the demolition and the start of construction, your security is vacant land. Most lenders will continue to advance progress payments without issue, but you should expect:
- A temporary increase in interest as your existing mortgage balance is rolled into the construction loan but no rental income or main-residence offset is available.
- A higher LVR window for several weeks where the land-only valuation may sit below the as-is value. This is normal and typically does not trigger any lender action.
- A build commencement deadline — lenders generally require demolition and construction to be sequential and substantially continuous, with most facilities requiring the build to commence within six months of first drawdown.
If you are refinancing, your broker should pre-negotiate the rate, fees and conversion terms so there are no surprises when the loan rolls to P&I.
Common pitfalls
1. Hidden site costs and provisional sums. A “fixed-price” contract that contains large provisional sums for site works, footings, soil engineering or council contributions is not fully fixed. The Housing Industry Association recommends asking your builder to convert provisional sums into firm pricing before signing.
2. Demolition surprises. Asbestos discovered mid-demolition can add $5,000–$15,000+ and weeks of delay. Always commission an asbestos and hazardous-materials report before signing the demolition contract.
3. LVR slippage during the build. Construction valuations can come in below the contract price if comparable sales soften. If your project pushes above 80% LVR mid-build, the lender may require an LMI top-up or additional equity. Building in a small equity buffer protects you.
4. Variations. Mid-build changes are the single biggest source of cost blowouts. Every variation needs lender approval if it changes the total project cost. Plan your inclusions, fixtures and finishes carefully before signing.
5. Build-window deadlines. Most lenders give you 18–24 months from first drawdown to reach practical completion. Missing the deadline can trigger a forced conversion to P&I on the partially drawn balance.
Why use a knock down rebuild finance specialist
Knock-down rebuilds combine the complexity of a construction loan, a refinance, a demolition, and (for many clients) an investment-property structure. A specialist mortgage broker:
- Models LVR scenarios across multiple lenders before you sign your building contract.
- Pre-negotiates the conversion rate so the loan rolls to a competitive P&I rate, not a back-book rate.
- Coordinates the demolition contract, builder paperwork and lender requirements so progress payments are not delayed.
- Identifies LMI waivers if you work in an eligible profession.
As your mortgage broker, we operate under the Best Interests Duty (effective 1 January 2021) which legally requires us to act in your best interests — not the lender’s. We are members of the Finance Brokers Association of Australia (FBAA) and the Australian Financial Complaints Authority (AFCA).
Documents you'll need for a knock down rebuild loan
Use this checklist before your first application meeting:
✅ Two recent payslips per applicant (PAYG) or last two tax returns plus a Notice of Assessment (self-employed)
✅ Three months of personal bank, savings and credit-card statements
✅ Photo ID (driver’s licence and passport)
✅ Existing mortgage statements (if refinancing)
✅ Council rates notice for the property to be demolished
✅ Signed fixed-price building contract with full inclusions
✅ Council-approved plans and specifications (or evidence of CDC pathway)
✅ Quote from a licensed demolition contractor, with site clearance and asbestos handling itemised
✅ Builder’s Australian Business Number, builder’s licence number and proof of public-liability and home-warranty insurance
✅ Asbestos report (for homes built before 1990)
✅ Quantity surveyor’s report if requested by the lender
✅ Evidence of savings/equity contribution
Ready to start? Book your free strategy session
Every knock down rebuild is different. We model your project across multiple lenders, identify any LMI waivers you may qualify for, and structure the finance so you keep cash flow under control through demolition, build and conversion.
Book a free knock-down-rebuild strategy session → — no cost, no obligation.
About the Author: Tom Luu
Tom Luu is a specialist mortgage broker and the founder of Professional Home Loans. With over 9 years of experience in the Australian mortgage industry, Tom specializes in complex lending scenarios, particularly for medical professionals, expats, and temporary visa holders. He is dedicated to helping clients navigate the nuances of Australian credit policies to secure the best possible financial outcomes.
Experience: 9+ Years in Mortgage Broking
Credentials: Credit Representative Number 486574
Expertise: Visa Home Loans, Professional LMI Waivers, and Expat Finance.
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FAQs Knockdown Rebuild Finance
How do you finance a knock down rebuild in Australia?
You finance a knock down rebuild in Australia by taking out a construction loan secured against your existing land. The lender pays your builder in progressive drawdowns at set construction stages — slab, frame, lock-up, fixing, and practical completion — and you pay interest only on the amount drawn so far. When the home is finished, the loan converts to a standard principal-and-interest home loan.
Can I get a loan to knock down and rebuild my existing home?
Yes. Most major Australian lenders offer knock down rebuild loans secured against your existing property. The lender refinances your current mortgage (if any) into a single construction facility, then funds the demolition and rebuild in stages. You typically need a fixed-price building contract, council-approved plans, and an on-completion valuation that supports the total project cost.
Do I need to pay out my existing mortgage before knocking down?
No. You do not need to pay out the existing mortgage from your savings before demolition. Your broker structures the deal so the new construction facility absorbs the existing mortgage balance and the demolition and build costs into a single loan secured against the same land. The old loan is discharged at the same settlement that establishes the new construction facility.
How much does a knock down rebuild cost in 2026?
A typical Australian knock down rebuild project in 2026 costs between $400,000 and $1.1 million all-in, depending on city, size and finish level. Demolition runs $12,000–$50,000, new-build construction averages $1,800–$3,500 per square metre for project homes, and premium custom builds reach $5,500+ per square metre. Sydney and Melbourne typically sit 10–20% above the national average.
Can I get a knock down rebuild loan for an investment property?
Yes. Investment-property knock down rebuilds use the same construction-loan structure as owner-occupier projects. Lenders will discount projected rental income for the build period, which reduces your borrowing power. Tax treatment is materially different — interest deductibility, capital works depreciation and CGT all change — so always involve a registered tax agent and the ATO rental property guidance.
What LVR do lenders accept for knock down rebuild loans?
Most lenders accept knock down rebuild loans up to 80% LVR without LMI and up to 90–95% LVR with LMI or a professional LMI waiver. LVR is calculated against the on-completion valuation, not the as-is land value. Owner-builder and cost-plus contract arrangements are usually capped at 60–70% LVR by the small number of lenders willing to fund them.
Can I live in the house during demolition?
No. You cannot live in the existing house during demolition or in the new dwelling during construction. Most homeowners rent temporary accommodation, move in with family, or rent furnished short-stay accommodation for the 8–14 month build window. Budget for 10–14 months of rent when planning your KDR — it’s one of the most commonly underestimated costs.
How long does the knock down rebuild loan process take?
The finance approval itself usually takes 4–8 weeks from a complete application to construction-loan settlement. The full project — from finance approval to keys in hand — typically takes 10–16 months. The ABS reports the average time between demolition approval and dwelling approval is 5.6 months, with the actual build adding another 6–10 months for a detached home.
What documents do I need for a knock down rebuild loan?
You need: payslips or tax returns; three months of bank statements; photo ID; council rates notice; signed fixed-price building contract; council-approved plans; licensed demolition quote; builder’s ABN, licence and insurance; asbestos report if the home pre-dates 1990; and evidence of savings or equity. A full checklist is included earlier on this page.
Can I use a knock down rebuild loan with the First Home Guarantee?
Generally no. The First Home Guarantee is designed for first home buyers purchasing a property, and most knock down rebuild clients are existing owners. Where a first home buyer purchases land with a demolition-and-build contract attached, eligibility can be checked through Housing Australia’s eligibility tool. The scheme expanded from 1 October 2025 with no income caps and no annual place limit, with Sydney’s price cap raised to $1.5 million.
Are demolition costs included in a knock down rebuild loan?
Yes. Demolition costs are typically included in a knock down rebuild loan, provided the demolition contract is from a licensed contractor, the cost is itemised separately from the build, and total project costs sit within your approved facility limit. The lender pays the demolition contractor as part of the first drawdown or as a discrete demolition stage before the slab stage.
Who are the best lenders for knock down rebuild finance?
There is no single “best lender” for knock down rebuild finance — the right lender depends on your LVR, contract value, profession, employment type and credit profile. The major banks (CBA, Westpac, NAB, ANZ) all offer construction loans, alongside non-bank lenders that often offer better rates for higher LVRs or non-standard income. A specialist broker compares the panel and matches you to the lender with the most competitive rate and the smoothest progress-payment process for your specific project.
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