Construction Loans and Progress Payments
🏗️ How a Construction Loan Works
Financing a new build is different from buying an existing home. A construction loan does not hand over all the money at once; it releases funds in stages as the build progresses, called progress payments or drawdowns. You usually pay interest only on what has been drawn so far, and the loan converts to a normal mortgage once the home is finished.
Staged Drawdowns
| Typical Stage | When Funds Release |
|---|---|
| Foundations | After the slab or foundations are done |
| Frame and roof | Once the structure is up and closed in |
| Fit-out | As interior work progresses |
| Completion | On practical completion and code compliance |
Why It Is Staged
The bank releases money only as value is added to the property, which protects them and you. It also means you are not paying interest on the whole loan from day one, since you only owe interest on what has actually been drawn.
💵 Interest and Payments During the Build
Interest Only on What Is Drawn
During construction you generally pay interest only, and only on the amount drawn so far. Early on, with just the foundations paid, the interest is small. As more is drawn for the frame, roof, and fit-out, the interest grows.
Budget for the Build Period
If you are renting while you build, you are paying rent plus the growing construction interest at the same time. Budgeting for this overlap is important, as it is a common pinch point that catches people out.
Each Drawdown Needs Approval
The bank usually requires confirmation, such as an inspection or builder's certification, before releasing each stage. Delays in the build can delay drawdowns and payments to the builder, so keep the process moving and the paperwork ready.
📑 Fixed-Price vs Cost-Plus Contracts
The Contract Type Drives Your Risk
How your build contract is structured has a big effect on cost certainty.
| Contract | How It Works | Cost Risk |
|---|---|---|
| Fixed-price | An agreed total for the defined work | Lower, but watch for excluded items and variations |
| Cost-plus | You pay the actual costs plus a margin | Higher, the final cost is uncertain |
Fixed-Price
A fixed-price contract gives a known total for the specified build, which suits financing because the bank and you know the number. But read what is included and excluded, and understand that variations and provisional sums can still change the price.
Cost-Plus
With cost-plus, you pay the real costs plus the builder's margin. It can suit complex or uncertain builds, but the final figure is open-ended, which is riskier for budgeting and finance. A contingency buffer is essential.
💡 Common Mistakes
Mistake 1: Forgetting the Rent-Plus-Interest Overlap
Paying rent and rising construction interest together can strain a budget. Plan for both across the whole build.
Mistake 2: No Contingency
Assuming the contract price is the final cost is risky. Variations and overruns are common, so hold a buffer.
Mistake 3: Not Understanding the Contract
Fixed-price and cost-plus carry very different cost risk. Know which you have and what is included before signing.
Mistake 4: Expecting Money Up Front
Funds release in stages, after each is confirmed. Builders need to be paid in line with that, so understand the drawdown schedule.
A Simple Approach
See our Building a House guide for the wider build process, and the Property New Build Calculator. Final word: a construction loan releases money in stages as the build progresses, with interest charged only on what is drawn, then converts to a normal mortgage. Plan for the build-period costs, understand your contract type, and hold a contingency. This is general information, not advice; work with your bank, lawyer, and builder.
🎯 Test Your Knowledge
Quiz on Construction Loans (20 Questions)