A construction loan is structured very differently from a standard home loan. Instead of receiving the full approved amount in one lump sum, your lender releases the funds in stages — known as progress payments — as the building work reaches certain milestones.
How It Works
The loan is typically divided into several payment stages, which may include:
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Base/Foundation – Funds released for site preparation and laying the foundation.
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Frame – Covers the cost of erecting the framework of the property.
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Lock-up – For external walls, windows, and doors.
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Fit-out – Interior work such as flooring, cabinetry, and painting.
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Completion – Final touches and finishing costs.
At each stage, the builder submits an invoice, and your lender releases the agreed amount directly to them.
Why This Matters for Interest Payments
With a construction loan, you only pay interest on the funds already drawn, not on the entire approved loan amount. This means your repayments are usually lower during the early stages of construction when less money has been released.
For example, if your total construction loan is $500,000 but your lender has only released $150,000 for the foundation stage, your interest is calculated only on that $150,000 until the next progress payment is made.
Managing Your Costs Effectively
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Plan your drawdowns carefully – Avoid drawing large amounts earlier than necessary.
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Coordinate with your builder and lender – Ensure that progress payment requests match actual work completed.
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Monitor the construction schedule – Delays can lead to extended interest payments and increased costs.
The Bottom Line
A construction loan’s staged payment structure can be a powerful tool to manage cash flow during the building process. By understanding how interest is calculated and by planning drawdowns strategically, you can keep early costs to a minimum and avoid unnecessary interest charges.
Need help structuring your construction loan for maximum savings?
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