The Structure That Determines Your Build Budget
Construction finance works differently to a standard home loan because you don't receive the full loan amount upfront. The structure of your construction loan dictates when funds are released, how interest is calculated, and what fees you'll pay along the way. Getting this wrong can mean paying interest on money you haven't used, missing payment deadlines with your builder, or discovering hidden costs halfway through your build.
Progressive Drawdown vs Full Advance: How Funds Are Released
Most construction loans use a progressive drawdown structure where the lender releases funds in instalments as your build reaches specific stages. You only pay interest on the amount drawn down at each stage, not the full loan amount. A typical progress payment schedule might release funds at slab stage, frame stage, lock-up stage, fixing stage, and practical completion. Between drawdowns, you're only charged interest on what's been released so far, which keeps your costs lower during the build period.
Consider a buyer building a custom home in Mount Eliza with a $650,000 construction loan. After the first drawdown of $130,000 at slab stage, they're paying interest on $130,000, not the full amount. If they were charged interest on the entire loan from day one, they'd be paying an extra $2,000 to $3,000 per month in unnecessary interest during the early stages. The progressive structure means their interest costs rise gradually as more funds are released.
Some lenders offer a full advance option where the entire loan amount is released upfront into a holding account. This structure suits owner builders or situations where you're managing payments to multiple sub-contractors directly, but you'll pay interest on the full amount from the start even though you haven't spent it yet.
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Fixed Price Contracts vs Cost Plus: Which Structure Your Lender Prefers
Lenders assess construction loan applications differently depending on your building contract type. A fixed price building contract with a registered builder is the simplest structure to approve because the lender knows the total cost upfront and has recourse to a licensed builder if something goes wrong. Most mainstream lenders will only consider fixed price contracts for construction finance.
A cost plus contract, where you pay the builder's costs plus a margin, introduces uncertainty that makes lenders cautious. The final cost isn't locked in, which means the loan amount might not cover the full build. Owner builder finance sits in a separate category again, with fewer lenders willing to provide funding and higher deposit requirements, often 20% to 30% instead of the standard 10% to 20%.
If you're planning a renovation rather than a new build, the structure changes again. A house renovation loan typically requires detailed plans, council approval if the work is substantial, and a builder's quote before the lender will assess the application. The drawdown schedule for renovations is usually shorter, with three to four stages instead of five or six.
Interest-Only Repayments During Construction: What You'll Actually Pay
During the construction period, most lenders offer interest-only repayment options, meaning you only pay the interest charged on the amount drawn down so far. You're not required to repay any principal until the build is complete and the loan converts to a standard home loan structure. This keeps your repayments lower while you're potentially still paying rent or a mortgage on your current property.
The interest rate on construction finance is usually slightly higher than a standard home loan, often 0.10% to 0.30% above the lender's advertised variable rate. Some lenders charge the same rate but add establishment fees or higher ongoing fees to offset the additional administration involved in managing drawdowns and progress inspections.
Once construction reaches practical completion, the loan converts to a principal and interest structure with standard home loan repayments. You'll usually have the option to fix all or part of the rate at this point, but during construction most lenders only offer variable rates.
Progress Inspection Fees and Drawing Costs You Need to Budget For
Every time you request a drawdown, the lender arranges a progress inspection to verify the stage of construction matches your builder's claim. Most lenders charge a Progressive Drawing Fee or similar cost for each inspection, typically $300 to $500 per drawdown. With five or six drawdowns across a build, that's $1,500 to $3,000 in fees that don't appear in the initial loan quote.
Some lenders cap these fees or include a set number of inspections in the loan package, but you need to confirm this during the construction loan application process. If your build runs over schedule and you need additional inspections beyond the standard stages, those extra fees add up quickly.
Beyond inspection fees, your building contract will specify whether you're responsible for council plans, engineering reports, or other costs before construction starts. These aren't part of the loan structure itself, but they affect your upfront cash requirements and need to be factored into your budget before you commit to a lender.
The Timeframe Clause That Can Void Your Approval
Most construction loan approvals require you to commence building within a set period from the disclosure date, typically six to twelve months. If you don't start construction within that window, the approval expires and you need to reapply. This clause catches buyers who secure finance before they've finalised council approval or sorted out delays with their builder.
In areas like Mount Eliza where development application timelines can stretch due to heritage overlays or coastal management zones, the gap between loan approval and construction commencement can blow out. If your approval lapses, you'll face a new assessment under current lending criteria, which might have changed since your original application. Interest rates might have shifted, your employment situation could be different, or the lender's policies might have tightened.
Before applying for construction finance, confirm your builder's start date and check that your council plans are either approved or close to approval. Submitting your loan application too early creates unnecessary risk that your approval will expire before you're ready to build.
Land and Construction Packages: One Loan or Two?
If you're buying land and building on it, you can structure the finance as a single land and construction package or as two separate loans. A combined structure means one application, one settlement for the land purchase, and progressive drawdowns for the build. The lender uses the land value plus the build cost as security, and you start paying interest on the land component immediately after settlement, then interest on construction funds as they're drawn.
A two-loan structure involves a standard home loan to purchase the land, then a separate construction loan once you're ready to build. This approach gives you flexibility if there's a gap between buying the land and starting construction, but it means two applications, two sets of fees, and potentially two different lenders if you want to shop around between purchases.
For most buyers building on land they've just purchased, a single package is simpler and often has lower overall fees. But if you already own suitable land or you're buying land well ahead of your build timeline, separating the two loans can make sense. Your broker can model both structures based on your timeline and deposit size to show which works better for your situation.
If you're ready to lock in the right construction loan structure for your build, call one of our team or book an appointment at a time that works for you. We'll walk through your building contract, your timeline, and the lenders who match your situation, so you've got the funding in place before your builder breaks ground.
Frequently Asked Questions
Do I pay interest on the full construction loan amount from the start?
No, with a progressive drawdown structure you only pay interest on the amount drawn down at each stage of construction. Interest costs increase gradually as more funds are released, which keeps your repayments lower during the early stages of the build.
What is a fixed price building contract and why do lenders prefer it?
A fixed price building contract locks in the total construction cost upfront with a registered builder. Lenders prefer this structure because it removes uncertainty about the final cost and provides recourse to a licensed builder if issues arise during construction.
What fees should I budget for beyond the loan itself?
You'll need to budget for progress inspection fees, typically $300 to $500 per drawdown, which can total $1,500 to $3,000 across a full build. You may also need to cover council plans, engineering reports, and other pre-construction costs depending on your building contract.
How long do I have to start building after my construction loan is approved?
Most lenders require you to commence building within six to twelve months from the disclosure date. If you don't start construction within that window, your approval expires and you'll need to reapply under current lending criteria.
Should I use one loan for land and construction or keep them separate?
A single land and construction package is usually simpler and has lower fees if you're building soon after purchasing the land. Separating the loans makes sense if there's a significant gap between buying the land and starting construction, or if you already own the land.
