Your construction loan structure determines how much interest you pay during the build and whether you can manage repayments while still paying rent or a mortgage elsewhere.
Most construction loans follow a progressive drawdown model where the lender releases funds in instalments as your build reaches specific stages. You only pay interest on the amount drawn down so far, not the full loan amount. The structure you choose affects cash flow, interest costs, and how smoothly your project moves from one stage to the next.
How Progressive Drawdown Works in Practice
The lender releases funds in stages tied to your progress payment schedule with the builder. Typically, you draw down funds after the slab is poured, when the frame goes up, after lockup, at fixing stage, and on practical completion. Each drawdown requires a progress inspection by the lender's valuer to confirm the work matches the stage claimed.
You pay interest only on the amount released so far. If your total loan is $500,000 and you've drawn $150,000 after the slab stage, you're paying interest on $150,000, not the full amount. As each stage is completed and funds are released, your interest charges increase incrementally. This structure keeps early interest costs lower than a loan where the full amount is advanced upfront.
Consider a client building in Ashgrove who had already sold their previous home and was renting while the build progressed. They structured the loan with interest-only repayments during construction, paying around $800 per month initially after the first draw, rising to roughly $2,200 per month by practical completion. Because repayments started low, they could manage rent and the construction loan simultaneously without needing a bridging loan.
Construction to Permanent Loan or Split Structure
A construction to permanent loan automatically converts to a standard home loan once the build is complete. You apply once, settle once, and avoid paying a second round of application fees or going through another approval process after construction finishes. Most lenders in Australia offer this structure as the default option for construction loans.
Some borrowers split the loan into two portions during construction: one covering land (if already purchased) and another covering the build. The land portion might convert to principal and interest repayments from day one, while the construction portion remains interest-only and draws down progressively. This approach suits buyers who want to reduce the total loan balance during the build or who have cash flow capacity to make larger repayments early.
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Fixed Price Building Contract and Why It Matters to Lenders
Lenders require a fixed price building contract before approving construction finance. The contract sets out the total build cost, the progress payment schedule, and the timeframe for completion. Without a fixed price contract, the lender cannot assess loan serviceability or determine how much to lend.
A cost plus contract, where the builder charges for materials and labour plus a margin, creates uncertainty around the final loan amount. Most mainstream lenders will not approve construction funding against a cost plus agreement. If you are working with an owner builder arrangement or a custom design that does not yet have a locked-in price, you will need to finalise costings and lock in a contract before proceeding with a formal loan application.
The contract also needs council approval and all relevant development application permits in place before the lender will settle the loan. This includes council plans, engineering certificates, and any other documentation required under your local authority's process. In Brisbane, this can vary depending on whether you are building in a character housing precinct or a standard residential zone.
How the Progress Payment Schedule Affects Cash Flow
Your builder's progress payment schedule determines when you need funds released and therefore when your interest charges step up. A schedule with five stages spreads the financial load more evenly than one with three large drawdowns. Some project home builders use a six-stage schedule, which keeps each individual payment smaller and gives you more time between interest increases.
The lender charges a progressive drawing fee each time you request a drawdown. This fee typically ranges from $150 to $400 per inspection, depending on the lender and location. If your build is in a regional area or requires a specialist valuer, the fee may be higher. Choosing a lender with lower drawing fees can save several hundred dollars across the build, particularly if your builder uses a detailed progress payment structure with more frequent claims.
Most construction loans include interest-only repayment options during the build, converting to principal and interest once you move in. Some lenders allow you to make additional payments during construction if you have surplus cash flow, which reduces the balance before the loan converts and lowers your ongoing repayments.
Land and Construction Package Versus Separate Loans
If you are purchasing land and building in one transaction, a land and construction package rolls both elements into a single loan. The land component settles first, and you begin paying interest on that portion immediately. The construction loan then draws down progressively as the build advances.
If you already own suitable land outright, you can use the equity in that land as part of your deposit for the construction loan. This reduces the loan amount and may allow you to avoid lenders mortgage insurance depending on your loan to value ratio. Some borrowers refinance an existing land loan into a new construction facility to consolidate the debt and access better interest rates.
Separate loans for land and construction can work if you purchased the land some time ago and now want to build. You would apply for construction finance only, using the land as security. The lender will value the land as part of the application and determine how much they are willing to lend based on the combined value of land and proposed dwelling once complete.
Owner Builder Finance and Specialist Lender Options
If you are acting as an owner builder, you will need to access construction loan options from banks and lenders across Australia that offer owner builder finance. Most major banks will not lend for owner builder projects due to the higher risk of cost blowouts and delays. Specialist lenders and some regional banks will consider these applications if you can demonstrate relevant building experience, a detailed cost breakdown, and a realistic construction timeline.
Owner builder finance typically requires a larger deposit, often 20% to 30% of the total project cost, and the lender may hold back a portion of the final drawdown until a registered builder certifies the work or until you receive your occupancy certificate. The progress inspection process is more detailed for owner builder projects, and you may need to provide receipts and invoices for materials and payments to sub-contractors before each drawdown is approved.
Renovation Finance Versus New Build Construction Loans
A house renovation loan follows a similar progressive drawdown structure but applies to an existing dwelling. If you are substantially renovating or extending a home in suburbs like Paddington or Ascot, where character homes are common, the loan structure will account for the fact that you may be living in the property during works or that the existing building has some value before the renovation begins.
Renovation finance often requires more frequent progress inspections because the scope of work is harder to standardise compared to a new build. Lenders want to confirm that structural work, plumbing, and electrical upgrades are completed to code before releasing funds for the next stage. If your renovation includes heritage overlays or character housing restrictions, expect the council approval process to take longer, which can delay loan settlement.
What Happens If You Do Not Commence Building Within the Set Period
Most construction loans require you to commence building within a set period from the disclosure date, usually six to twelve months. If you do not start within that window, the lender may withdraw the approval or require you to reapply. Interest rates, serviceability criteria, and lender policies can all change during that time, so delaying the build creates uncertainty around whether your loan will still be available on the same terms.
If your builder experiences delays due to supply shortages, labour availability, or weather, communicate with your lender as early as possible. Some lenders will extend the commencement period if you can demonstrate that the delay is outside your control and that the builder is still committed to the project. Others may require a formal loan variation or a new valuation if the delay is significant.
Once construction begins, most lenders allow twelve to eighteen months for completion. If the build runs over that timeframe, the lender may extend the construction period but will continue charging interest on the drawn amount and may impose additional fees or move you to a higher interest rate until practical completion occurs.
Construction loan structures vary more between lenders than standard home loans, particularly around drawing fees, inspection processes, and flexibility during the build. Call one of our team or book an appointment at a time that works for you to discuss which structure suits your build, your cash flow, and the type of contract you are working with.
Frequently Asked Questions
Do I pay interest on the full construction loan amount from the start?
No, you only pay interest on the amount drawn down at each stage of the build. If you have drawn $150,000 from a $500,000 loan, you pay interest on $150,000 until the next drawdown is released.
What is a construction to permanent loan?
A construction to permanent loan automatically converts to a standard home loan once your build is complete. You apply once and avoid paying a second round of fees or going through another approval process after construction finishes.
Can I use a cost plus contract for construction finance?
Most mainstream lenders require a fixed price building contract and will not approve funding against a cost plus agreement. You need a locked-in price and progress payment schedule before applying for construction finance.
What happens if my builder delays the start of construction?
Most lenders require you to commence building within six to twelve months of loan approval. If you do not start within that period, the lender may withdraw the approval or require you to reapply under current criteria.
How much does a progress inspection cost during a construction loan?
Lenders typically charge a progressive drawing fee of $150 to $400 per inspection, depending on the lender and location. This fee applies each time you request a drawdown as your build reaches a new stage.
