Last reviewed: August 2026
Most granny flats in Sydney are funded by drawing on the equity in the existing property, either through a construction loan, a loan increase, or a redraw. Cash and personal loans make up most of the rest. Which option suits you depends on your equity position, your income, and how your lender treats the build.
This article explains how each one works. It is not advice about which to choose, because that depends on your circumstances and belongs with a broker or your lender.
The main options
| Option | How it works | Generally suits |
| Construction loan | Lender advances funds in stages as the build progresses | Larger builds, people with equity but not cash |
| Loan increase or top-up | Increase your existing home loan and draw the funds | People with equity and a straightforward lender |
| Redraw or offset | Use funds already available in your existing loan | People who have paid ahead on their mortgage |
| Line of credit | A revolving facility secured against the property | People wanting flexibility across a project |
| Cash | Self-funded | People with savings who want no lending involved |
| Personal loan | Unsecured, higher rate, shorter term | Smaller shortfalls, not usually a whole build |
How a construction loan works
This is the one people find least familiar, so it is worth explaining properly.
A construction loan does not hand you the whole amount at settlement. The lender releases money in stages, and each stage is paid after that part of the work is finished and inspected. You pay interest only on what has been drawn, which keeps repayments lower during the build.
Typical progress stages:
| Stage | Roughly when |
| Deposit | At contract signing |
| Base or slab | Slab poured |
| Frame | Frame and roof structure up |
| Lock-up | Windows, doors and external cladding in |
| Fit-out or fixing | Internal linings, cabinetry, fixtures |
| Completion | Practical completion and handover |
Each drawdown usually needs an invoice from the builder and often a valuer’s inspection. The practical effect is that the build and the finance move together, and delays in one create delays in the other.
What a lender will want to see
Broadly, expect to be asked for:
- A fixed price building contract, signed
- Council or certifier approval, so the build is legal
- Detailed plans and specifications
- Builder’s licence details and insurance, including home building compensation cover where it applies
- A valuation, usually “on completion”, which values the property as it will be once built
- Evidence of your income and existing commitments
The two that catch people out are the approval and the fixed price contract. Many lenders will not release construction funds without both, which means the approval pathway has to be complete before the finance is. It is worth checking your lender’s requirements early so the sequence works.
The lending sequence, in order
- Talk to a broker or lender about your borrowing capacity before you commit to a build
- Get a site assessment and a fixed price quote
- Get approval, whether complying development or a development application
- Sign the building contract
- Submit the contract, plans and approval to the lender
- Lender values the property on completion and formally approves
- Construction starts, with funds released in stages
- Final drawdown at completion
Doing step 1 first saves the most pain. Finding out your borrowing capacity after you have signed a contract is the wrong order.
Things worth asking your lender or broker
- Will you lend against a secondary dwelling on the same title
- Do you require an “on completion” valuation, and who pays for it
- What are your progress payment stages, and do they match my builder’s
- Are there fees for each drawdown
- Will you count potential rental income from the granny flat toward my borrowing capacity
- What happens if the build runs over time
That question about rental income is worth asking specifically. Lenders treat projected granny flat rent differently from each other, and it can change what you are able to borrow.
The valuation point people miss
Lenders generally value the property as a whole once the granny flat is complete. They are not valuing the granny flat as a separate asset, because it is not one. It cannot be subdivided and sold separately under the Housing SEPP.
So the relevant question is what the whole property is worth with an approved secondary dwelling on it, which brings you back to your suburb and your buyer pool.
Frequently asked questions
Can I get a loan for a granny flat?
Generally yes, most commonly by drawing on equity in the property or through a construction loan. What you can borrow depends on your equity, income and the lender’s policy. A broker can tell you quickly.
Do lenders count granny flat rent toward my borrowing capacity?
Some do, some do not, and those that do often apply a discount to the projected rent. It varies enough between lenders that it is worth asking directly rather than assuming.
Do I need approval before I can get finance?
Usually yes for a construction loan, because the lender needs to know the build is legal before releasing funds. If you are funding it from redraw or cash, the sequencing is more flexible, though building without approval is not advisable in any case.
What is an “on completion” valuation?
A valuation of what the property will be worth once the granny flat is finished, rather than what it is worth today. Lenders use it for construction lending because the security is the finished property.
Can I use a personal loan?
You can, though the rate is usually higher and the term shorter than secured lending, so it is more often used to cover a shortfall than to fund a whole build. A broker can compare it against the secured options for you.
Get an accurate cost so the finance conversation is real
Every finance conversation starts with a number. A fixed price quote after a site assessment gives your broker something solid to work with, rather than a range.
Book a site assessment, or call BlueGum on 1300 060 651.
BlueGum Granny Flats is a licensed NSW builder, licence number 247388C. This article is general information about how construction finance works and is not financial or credit advice. It does not consider your objectives or circumstances. Speak to a licensed mortgage broker, your lender, or a financial adviser before making a borrowing decision.
