A construction loan is a short-term facility that funds the building of a home by releasing money in stages (progress payments) as each phase of the build is completed. You do not receive the full loan amount up front — the bank pays the builder at agreed milestones, and you only pay interest on the portion that has been drawn.
Typical Stages and How Payments Are Released
Lenders and builders agree a progress payment schedule that matches the building contract. Typical milestones are: deposit, slab/base, frame, lock-up (roof, windows, doors), fit-out/fixing, and practical completion.
Percentages vary by contract, but a common split is:
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Deposit: 5%
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Slab/Base: 15%
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Frame: 20%
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Lock-up: 20%
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Fit-out: 30%
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Practical completion: 10%
Lenders generally require a valuer or inspection to confirm each stage before releasing the next payment.
How Repayments Work During Construction
Most construction loans operate on interest-only repayments during the build phase: you pay interest only on the amount drawn at each stage, not on the total approved loan.
After the final progress payment, the loan typically converts to a standard principal-and-interest mortgage and the full loan term begins.
Example
On a $500,000 construction loan at 6% p.a., if only $150,000 is drawn in the first 4 months, your interest would be:
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Annual interest on $150,000 = $9,000
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Monthly interest ≈ $750
You are paying interest only on the $150,000 drawn, not on the full $500,000, until later drawdowns occur.
Key Risks to Watch For
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Cost overruns – If build costs exceed your approved loan, you’ll need extra funds.
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Delays – Inspections and disputes with the builder can delay payments and progress.
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Repayment shock – Payments can jump significantly once the loan converts to principal and interest.
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Loan features – Offset accounts, redraw options, and fees vary between lenders.
Practical Checklist Before You Apply
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Obtain conditional pre-approval to know your borrowing capacity.
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Use a fixed-price contract with a clear progress payment schedule.
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Set aside a contingency budget (5–10% of build cost).
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Confirm the lender’s inspection and valuation process.
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Calculate repayments at different drawdown stages and after completion.
For personalised construction loan advice or to review your building budget:
Call/WhatsApp: +84 96 275 92 07
Email: support@sw-globalfinance.com.au