Construction finance charges you interest only on the amount drawn down, not the full approved loan amount from day one.
That's the part most people want to know first. When you borrow for an existing property, the full loan amount is paid to the seller at settlement and you start paying interest on the entire balance immediately. With construction loans, the lender releases funds in stages as the build progresses, and you only pay interest on what's been released so far. If $150,000 has been drawn to cover the slab and frame, you're paying interest on $150,000, not the full $400,000 loan.
How progressive drawdown actually works
Your builder submits a claim when each stage is complete. The lender arranges an inspection, usually through a quantity surveyor or building inspector, to confirm the work matches the claim. Once approved, the funds are released directly to the builder. You don't handle the payments yourself.
Most lenders work to a five or six stage drawdown schedule: deposit, base or slab, frame, lock-up, fixing, and completion. Some allow more stages depending on the contract type. The builder's progress payment schedule needs to align with what the lender will release at each stage, which is why your broker reviews both documents before lodging the application.
Consider someone building in a regional area with a fixed price building contract for $420,000. The deposit stage releases 10%, the slab another 15%, frame 25%, lock-up 20%, fixing 20%, and final 10%. At lock-up, they've drawn roughly 70% of the loan, so around $294,000. That's the balance they're paying interest on until the next stage is complete and the next drawdown occurs.
Interest-only repayment options during construction
Most construction loans default to interest-only repayments while the build is underway. You're not required to pay down the principal until the loan converts to a standard home loan after completion. Some lenders allow you to make additional payments during construction if you want to reduce the balance early, but it's not required.
The interest rate during construction is often slightly higher than the ongoing rate once the loan converts. Some lenders apply a construction loan interest rate that's a margin above their standard variable, others use a specific construction product rate. Once the build is finished and the final inspection is done, the loan converts to a standard variable or fixed rate home loan and you switch to principal and interest repayments unless you opt to stay interest-only.
What you'll pay in fees beyond the interest rate
Every lender charges a progressive drawing fee or progress payment fee each time funds are released. This typically ranges from $200 to $400 per drawdown. With six stages, you're looking at $1,200 to $2,400 in inspection and drawdown fees across the build.
Some lenders also charge a valuation fee upfront to assess the land value and the value of the completed property based on the plans and contracts. That's usually $300 to $600. If you're doing a land and construction package, the lender may require two valuations, one for the land and one for the construction component.
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Land and construction package or cost plus contract
A land and build loan is just a construction loan where the first drawdown covers the land purchase instead of a deposit to a builder. You settle on the suitable land, then construction funding begins once council approval and building permits are in place. The lender needs to see the development application approved and the fixed price building contract signed before they'll release construction funds.
With a cost plus contract, the builder charges for materials and labour as the project progresses, plus a margin. Lenders are far more cautious with these because the final cost isn't fixed. You'll usually need a larger deposit, sometimes 20% or more, and the lender will want a detailed cost breakdown before approving the loan amount. Most prefer fixed price contracts where the builder is locked into the price regardless of cost overruns.
In our experience, someone building a custom design home with specific finishes often ends up with a cost plus arrangement because the builder can't price it accurately upfront. The lender will set a maximum loan amount based on the estimated costs, but if the build runs over, you'll need to cover the difference yourself unless you can prove the increase was due to essential variations and the lender agrees to reassess.
Owner builder finance and registered builder requirements
Most lenders won't offer owner builder finance unless you're a licensed builder yourself. The risk is too high. If you're acting as an owner builder without trade qualifications, you'll struggle to find a lender willing to fund the project. The few that do will require a much larger deposit, often 30% or more, and they'll scrutinise every part of the build process.
If you're using a registered builder, the lender requires proof of their license and insurance before approving the loan. They'll also want to see that the builder is solvent and has a history of completing projects on time. A builder who's gone into administration halfway through someone else's project won't get a loan approved for your build, even if they've re-registered under a new entity.
When you need to commence building and what happens if you don't
Most lenders require you to commence building within a set period from the disclosure date, usually six to twelve months. If you don't start within that window, the approval lapses and you'll need to reapply. That means council plans need to be approved, the building contract signed, and the builder ready to start before you reach that deadline.
If the builder delays the start due to permit issues or weather, some lenders will extend the commencement period if you provide evidence. Others won't, and you'll lose the approval. If rates have moved higher in the meantime, your new approval might come with a higher construction loan interest rate or stricter lending criteria, which can change your borrowing capacity.
Renovation finance and home improvement loan structures
A house renovation loan works similarly to new home construction finance if the scope is large enough. Lenders will release funds progressively based on stages like demolition, structural work, plumbing and electrical rough-in, and finishes. You'll need quotes from the plumbers, electricians, and other sub-contractors, plus a project plan that breaks the work into clear stages.
Smaller renovations are usually funded through a home improvement loan, which might release funds in two or three stages rather than five or six. Some lenders offer a single lump sum at the start if the renovation cost is under a certain threshold, typically $50,000 to $100,000, and the property has enough equity to secure the additional borrowing.
If you've got a finance question about your build, whether it's a project home loan for a house and land package or custom home finance for something more specific, call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
How does interest work during a construction loan?
You only pay interest on the amount drawn down at each stage, not the full loan amount. As the builder completes each phase and funds are released, your interest charges increase to reflect the new balance.
What fees do lenders charge for construction loans?
Lenders charge a progressive drawing fee of $200 to $400 each time funds are released, plus an upfront valuation fee of $300 to $600. Over a typical six-stage build, expect $1,200 to $2,400 in drawdown fees.
Can I get a construction loan as an owner builder?
Most lenders won't offer owner builder finance unless you're a licensed builder. If you're not trade-qualified, the few lenders who consider it will require a much larger deposit, often 30% or more.
How long do I have to start building after loan approval?
Most lenders require you to commence building within six to twelve months from the disclosure date. If you don't start within that period, the approval lapses and you'll need to reapply.
What's the difference between a fixed price contract and a cost plus contract for construction finance?
A fixed price contract locks the builder into a set price, which lenders prefer because the cost is known upfront. A cost plus contract charges for materials and labour as the project progresses, making it harder to secure finance and usually requiring a larger deposit.
