Construction finance operates differently to standard home loans because the property doesn't exist when you apply.
Instead of receiving the full loan amount upfront, funds are released progressively as your build reaches specific stages. You only pay interest on what's been drawn down, not the total loan amount. This structure affects your cash flow during construction and determines how much you'll spend before moving in.
How Progressive Drawdown Actually Works
Your lender releases funds at predetermined milestones throughout the build, not when your builder sends an invoice. Most lenders follow a five or six-stage schedule: base stage, frame stage, lock-up stage, fixing stage, and completion. When your builder reaches each stage, they submit a progress claim. The lender arranges an inspection, and if approved, releases that portion of funds directly to the builder.
Consider someone building a new home in Wamberal valued at $850,000. At the base stage, the lender might release $170,000 (typically 20% of the build cost). The borrower only pays interest on that $170,000 until the frame stage is reached. When the frame goes up and passes inspection, another $170,000 gets released, and interest applies to the cumulative $340,000. This continues through each stage until completion.
Most lenders charge a progressive drawing fee each time they conduct an inspection and release funds. These fees typically range from $250 to $450 per draw, so across five stages, you're looking at $1,250 to $2,250 in additional costs during the build. Factor these into your construction budget alongside council approval fees and development application costs.
Fixed Price Contracts Versus Cost Plus Arrangements
A fixed price building contract sets a total build cost that won't change unless you request variations. Most lenders prefer this structure for construction loans because it provides certainty about the final loan amount. Your builder quotes $650,000 to build your home, you sign the contract, and barring any changes you request, that's what you'll pay.
Cost plus contracts work differently. The builder charges their actual costs plus a margin, usually 10-15%. This structure offers more flexibility if you want to make decisions as the build progresses, but creates uncertainty for lenders. Many won't approve construction finance under cost plus arrangements because the final loan amount can't be confirmed upfront.
In our experience working with clients across the Central Coast, fixed price contracts with a registered builder smooth the application process considerably. Lenders release funds according to the agreed progress payment schedule, and you can calculate your interest costs during construction with reasonable accuracy.
Interest-Only Repayments During Construction
During the build period, you make interest-only repayments on whatever amount has been drawn down. You're not repaying any principal, and you're not paying interest on the full loan amount until completion.
Someone building in Terrigal with a $700,000 construction loan might have $280,000 drawn down after the frame and lock-up stages. At current variable rates, that could mean monthly interest payments around $1,400 to $1,600. As more funds are released, those payments increase. Once the build finishes and the loan converts to a standard mortgage, principal and interest repayments commence on the full amount.
This structure requires planning because your payments change every few months during construction. If you're also paying rent elsewhere while building, or holding a mortgage on land you've purchased, your cash flow needs careful management. Some people building a custom home underestimate how much their monthly outgoings increase as each stage completes.
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Land and Construction Packages Versus Separate Purchases
Buying land separately and then applying for construction finance involves two separate transactions. You purchase the land with a standard land loan, then apply for construction funding once you have council plans and a signed building contract. The construction loan pays out your land loan and provides the build funding in one package.
Land and construction packages from developers bundle both elements together. You sign one contract for the land and the build, often through a project home builder. The finance application covers both components from the start. These packages can simplify the process, particularly for buyers in growth areas like Warnervale or Wadalba where new estates are common.
The key difference lies in flexibility. Buying suitable land separately gives you more control over location and block selection, plus you can choose any registered builder for a custom design. Packages typically limit you to the developer's builder and their standard designs. Neither approach is inherently better, it depends on whether customisation or convenience matters more for your situation.
One practical consideration: lenders typically require you to commence building within a set period from the disclosure date, usually 12 to 18 months. If you buy land separately without construction plans ready, that timeline can feel tight. You need development application approval, council approval, a signed contract with your builder, and lender approval, all within that window.
What Happens at Practical Completion
Once your builder reaches practical completion and you receive the keys, the construction loan converts to a standard mortgage. This transition happens automatically with most construction to permanent loan structures. Your interest-only period ends, and you commence making principal and interest repayments on the full loan amount.
Some borrowers underestimate the payment jump at this stage. During construction, you might have been paying interest on $400,000. After conversion, you're suddenly repaying principal and interest on perhaps $750,000. That could mean payments increasing from around $2,000 per month to $4,500 or more, depending on your loan amount and interest rate at the time.
Before signing your building contract, model what your repayments will look like after completion. If those numbers don't work with your household income, you're either borrowing too much or need to adjust your build specifications. Construction finance gets approved based on your ability to service the full loan amount after conversion, not just the interest-only payments during the build.
Building a home involves coordinating builders, plumbers, electricians, and various sub-contractors through a process that typically takes nine to twelve months. The finance structure needs to support that timeline while keeping your costs manageable. Understanding how progressive drawdowns work, what your repayments look like at each stage, and what happens at completion helps you budget accurately and avoid surprises halfway through the build.
Whether you're building your first home, constructing an investment property, or managing an owner builder project, the loan structure affects your cash flow from the day you break ground until you move in. Getting the right construction finance in place means matching the drawdown schedule to your building contract, understanding when inspection fees apply, and planning for the payment increase when your build finishes.
Call one of our team or book an appointment at a time that works for you. We can walk through your specific build plans, explain which lenders work with your builder and contract type, and show you exactly what your payments will look like from site preparation through to moving in.
Frequently Asked Questions
How does progressive drawdown work on a construction loan?
Lenders release funds at specific build stages rather than providing the full amount upfront. You only pay interest on the amount drawn down at each stage, not the total loan. Most lenders follow a five or six-stage schedule from base to completion, with inspection fees charged at each drawdown.
What is the difference between a fixed price contract and cost plus contract for construction loans?
A fixed price contract sets a total build cost that won't change unless you request variations, which most lenders prefer. Cost plus contracts charge actual costs plus a margin, offering flexibility but creating uncertainty about the final loan amount. Many lenders won't approve construction finance under cost plus arrangements.
Do I pay principal and interest during construction?
During construction, you make interest-only repayments on whatever amount has been drawn down. Once the build reaches practical completion, the loan converts to a standard mortgage and you commence principal and interest repayments on the full loan amount.
What fees apply during construction loan drawdowns?
Most lenders charge a progressive drawing fee each time they conduct an inspection and release funds, typically $250 to $450 per draw. Across five stages, this adds $1,250 to $2,250 to your construction budget.
Can I buy land separately and then get construction finance?
Yes, you can purchase land with a standard land loan, then apply for construction funding once you have council approval and a signed building contract. The construction loan pays out your land loan and provides build funding in one package, though you typically must commence building within 12 to 18 months.
