Guide · Loan basics
The Construction Loan Process, Step by Step
Financing a build is not the same as buying an existing home. Instead of one lump sum at settlement, the money is released in stages as your house goes up, and you only pay interest on what's been drawn. Here's how the whole process runs, and where it catches people out.
A construction loan is designed for building a new home or doing a major renovation. The key difference from a normal loan is how the money comes out. Rather than handing over the full amount at once, the lender pays your builder in instalments, called progress payments, as each stage of construction is finished. You're only charged interest on the money that's actually been drawn down, so your repayments start small and grow as the build progresses. Most construction loans are interest-only during the build, then convert to a normal principal and interest loan once the home is complete.
The building stages and progress payments
Your builder's fixed-price contract sets out the stages and how much is paid at each one. The percentages vary between builders, but a typical structure looks something like this. The lender releases each payment after that stage is done and, usually, after a valuer confirms the work.
| Stage | What's done | Rough share |
|---|---|---|
| Deposit | Initial payment to start the contract | About 5 percent |
| Base / slab | Site prep and the foundation slab | About 15 percent |
| Frame | The structural frame, walls and roof trusses | About 20 percent |
| Lockup | External walls, windows and roof, weathertight | About 20 percent |
| Fixing / fit-out | Internal plumbing, electrical, cabinetry | About 30 percent |
| Completion | Final finishes, handover and keys | About 10 percent |
How the process runs start to finish
- You get finance approved based on the land value plus your builder's fixed-price contract.
- At settlement, the land portion is paid and, if you already own the land, that's factored in.
- As each stage completes, the builder invoices, the lender arranges a valuation or inspection, and the progress payment is released.
- You pay interest only on the amount drawn so far, so repayments rise as the build advances.
- At completion, the loan converts to a standard principal and interest home loan.
Two things that trip people up
First, budget for interest during the build on top of any rent or existing mortgage you're paying, because you're carrying both until you move in. Second, lenders want a fixed-price building contract from a licensed builder. Cost overruns and variations outside that contract can create funding gaps you have to cover yourself, so keep changes to a minimum once you've started.
You may have scheme help too
If you're building your first home, you may be eligible for grants aimed at new builds and for stamp duty concessions on the land, which can meaningfully reduce your costs. Eligibility and thresholds change, so it's worth checking. I cover the schemes in the first home buyer schemes guide.
Construction lending has more moving parts than a standard purchase, and the paperwork around progress payments and valuations is where it pays to have someone managing it for you. That's a big part of what I do here, so you can focus on the build and not the bank. If you're weighing up how to fund it, understanding your borrowing power and getting pre-approval first are the right starting points.
Building or renovating?
Send me your builder's contract and land details and I'll map out the construction loan and the progress payments with you.
Frequently asked questions
How do construction loan repayments work during the build?
You only pay interest on the money that's been drawn down so far, not the full loan amount, and most construction loans are interest-only during the build. So repayments start small after the first progress payment and grow as each stage is funded. Once the home is finished, the loan converts to a normal principal and interest loan.
What are progress payments on a construction loan?
They're the instalments the lender pays your builder as each stage of construction is completed, such as the slab, frame, lockup, fit-out and completion. The builder's fixed-price contract sets out how much is paid at each stage. The lender usually confirms the work, often with a valuation, before releasing each payment.
Do I pay interest on the whole loan while building?
No. You're charged interest only on the amount drawn down at each stage, so early in the build your interest is low and it rises as more is released. It's still wise to budget for those growing interest costs during construction, especially if you're also paying rent or an existing mortgage at the same time.
Important information
This information is general in nature and does not take your personal objectives, financial situation, or needs into account. It is not credit assistance or a recommendation to enter into any particular credit contract. Consider whether it is right for you and seek advice before acting. Lending is subject to a lender's eligibility and approval criteria. Terms, conditions, fees, and charges apply.
Greenwood Finance · ABN 23 671 049 693 · Credit Representative No. 551942.
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