Avoid These 7 Construction Loan Risks

The Risk Most Builders Won't Mention Upfront

Construction loans charge interest only on what's been drawn down, but that doesn't mean your repayments stay predictable. Every time your builder submits a claim and the bank releases funds, your repayment increases. If your income doesn't support the full loan amount at the end of the build, or if your builder front-loads their payment schedule, you can end up squeezed halfway through the project with no way to pause the process.

Consider a buyer building a custom home in Cheltenham on a land and construction package near the local station precinct. They borrowed based on a fixed price building contract with five progress payments spread evenly across the build. The builder submitted claims early, and by the time the frame was up, 70% of the funds had been drawn. The buyer's repayments jumped from around $800 a month to over $2,000 before the roof was even on. They had budgeted for gradual increases, not a steep climb in the first three months.

This happens because lenders approve your construction loan based on the total amount you'll owe at completion, not what you're paying in the early stages. If your income or expenses change during the build, or if you didn't account for how quickly repayments can climb, you're locked into a contract with no flexibility to slow down.

When Your Builder Runs Out of Cash

If your builder goes into administration or walks off the job, your lender doesn't automatically release the remaining funds to a new builder. The loan is tied to the original contract, and most lenders will freeze further drawdowns until you renegotiate terms, provide updated costings, and sometimes reapply altogether. You're still liable for the loan amount already drawn, but you can't access what's left without starting the approval process again.

In a scenario like this, you're also responsible for securing the site, arranging independent inspections, and negotiating with subcontractors who may not have been paid. If your plumbers or electricians haven't been paid by the builder, they can lodge caveats against your property even though the funds were released by the bank. You end up paying twice for work that's already been done, or you're delayed for months while disputes are resolved.

Cost Plus Contracts and Funding Gaps

A cost plus contract means you're paying the builder's actual costs plus a margin, rather than a fixed price. Lenders treat these as higher risk because there's no cap on what the build will cost. Most banks will lend based on an estimated build cost, but if that estimate is wrong, you're responsible for the difference. If the builder underquotes to win the job, or if materials or labour costs increase mid-build, you'll need to fund the gap yourself or stop the project.

We regularly see buyers in Cheltenham drawn to cost plus arrangements because they want control over finishes or design changes, but they don't realise how much harder it is to get funding approved. The lender will often require a quantity surveyor's report upfront, and even then, they'll cap the loan at a conservative figure. If your builder's estimate comes in higher than the valuer's assessment, you're either finding extra cash or redesigning before you've even started.

Council Approval Delays and Loan Expiry

Most construction loans require you to commence building within a set period from the disclosure date, usually six to twelve months. If your development application with Bayside City Council takes longer than expected, or if you need to submit revised plans, you can run past that deadline. The loan offer expires, and you'll need to reapply under whatever lending conditions exist at that point. If rates have increased or your financial situation has changed, you might not get the same terms, or you might not get approved at all.

Cheltenham sits within Bayside, and council approval times can stretch out if your site is near heritage areas or if neighbours lodge objections. You can't control the timeline, but your lender won't extend the loan offer indefinitely. The risk is that you've bought land, paid deposit and stamp duty, and then lose your funding before the build starts.

Progressive Drawing Fees Add Up

Every time the bank releases funds to your builder, they charge a progressive drawing fee. Depending on the lender, this can be anywhere from $200 to $500 per drawdown. If your building contract includes five or six progress payments, you're looking at $1,000 to $3,000 in fees on top of your loan amount, and these are usually deducted from the drawdown itself rather than paid separately.

Some buyers assume these fees are part of the loan establishment cost, but they're not. They're recurring, and they're not always disclosed clearly at the application stage. If you're budgeting tight and relying on every dollar of the approved loan amount to complete the build, losing $2,000 or more to drawdown fees can leave you short at the end.

Interest Rate Movements During the Build

Construction loans are almost always issued on a variable rate during the building phase. If you're planning to convert to a fixed rate once the build is complete, you're exposed to whatever rate movements happen in the meantime. A build that takes six to twelve months can see multiple rate changes, and because you're only paying interest on the drawn amount, the impact grows as the build progresses.

If rates rise during your build, your repayments increase at every drawdown. You can't lock in a fixed rate until the property is complete and you've converted to a standard home loan. Some lenders offer interest-only repayment options during construction, but that doesn't protect you from rate increases. It just means you're not paying principal yet.

Owner Builder Finance and Compliance Conditions

If you're acting as an owner builder, most lenders either won't approve your loan or will apply stricter conditions. You'll need to prove you have the skills, qualifications, or documented experience to manage the project, and even then, the lender will usually cap the loan at a lower percentage of the total cost. They'll also require detailed project plans, fixed price contracts with subcontractors, and regular progress inspections before releasing each tranche of funds.

Owner builder finance is harder to access because the lender has no recourse if the build stalls or goes over budget. There's no registered builder to hold accountable, so they offset the risk by lending less and scrutinising more. If you're considering this in Cheltenham, expect to provide council plans, proof of insurance, and a full schedule of who's doing what work before you'll get approval. The margin for error is much smaller, and the funding timeline is longer.

If you're building in Cheltenham or anywhere across Bayside, get your construction funding structure right before you sign anything. Call one of our team or book an appointment at a time that works for you.

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