How construction loans actually work
Construction loans work differently to standard home loans. Unlike a regular loan where the full amount is released at settlement, a construction loan releases funds in stages as the build progresses called progress draws. You only pay interest on what's been drawn down.
The 6 progress draw stages
Land settlement
If land is purchased separately, the land portion is drawn first at settlement.
Base / Slab
Foundation poured. First draw typically covers 10–15% of the build price.
Frame
Frame erected, inspected and signed off. Approx 15–20% of the build.
Lock-up
Roof, walls, windows and doors complete. Home is weatherproof. Approx 20% draw.
Fixing
Internal fit-out: plaster, cabinetry, doors, baths. Approx 20% released.
Practical completion
Build finished, final inspection done. Remaining balance (5–10%) released.
In the early stages, repayments are low. As more draws are made, repayments increase. Once complete, the loan typically converts to a standard variable rate loan.
Documents the lender needs
- Fixed-price building contract:signed by you and a licensed builder
- Council-approved plans and permits
- Builder's licence and insurance (home warranty insurance)
- Proof of land ownership or land contract
- Your standard financial documents:income, expenses, ID
- Quantity surveyor report:some lenders require this to validate the build cost
How draw requests work
When a stage is completed, your builder issues an invoice. You submit a draw request to the lender. The lender may arrange an inspection (takes 5–10 business days), then pays the builder directly funds don't pass through your account.
Planning a build?
Let's get the finance sorted before you sign anything with a builder.
Common mistakes to avoid
- Signing a building contract before finance is approved you may be locked into penalties
- Using a cost-plus contract:most lenders require fixed-price
- Underestimating costs:always budget 10–15% contingency
- Not checking lender construction policies:some lenders process draws much faster than others