The Easiest Way to Understand Construction Loan Features

You Only Pay Interest on What's Been Drawn Down

With construction finance, you only pay interest on the amount that's been released to the builder at each stage, not the full loan amount upfront. If your loan amount is approved for $600,000 but only $150,000 has been drawn to cover the initial slab and frame, your interest charges apply to that $150,000 until the next drawdown occurs.

Consider a couple building in Narellan Vale who secured a land and construction package. They purchased the land for the site cost, then moved into the construction phase with a fixed price building contract for their new home. At the slab stage, the lender released $120,000. Their monthly interest charge at that point was calculated only on that portion, not the total approved facility. Once the frame and lockup were completed and inspected, another $180,000 was released, and interest recalculated on the new drawn balance of $300,000. This structure kept their holding costs lower during the early months compared to borrowing the full amount from day one.

The progressive drawdown works in stages tied to a progress payment schedule, which is agreed between you, the builder, and the lender before construction begins. Typical stages include base, frame, lockup, fixing, and practical completion. Each stage requires a progress inspection by the lender or a third-party valuer to confirm the work has been completed before funds are released to pay sub-contractors and suppliers.

Construction Draw Schedule and How It's Structured

A construction draw schedule sets out when funds will be released during the build and what percentage of the contract price each stage represents. Most lenders follow a standard five or six-stage schedule, though this can vary depending on whether you're working with a registered builder under a fixed price contract or managing the build as an owner builder.

In Narellan, where house and land packages and custom design builds are common, the draw schedule is usually locked in before the first payment is made. The lender will want to see council approval, the development application outcome, and the signed building contract. Once construction begins, each drawdown is triggered by the builder submitting an invoice and the lender arranging an inspection to confirm progress aligns with the claim.

If you're using a cost plus contract instead of a fixed price building contract, the draw schedule becomes more flexible but also requires closer monitoring. With cost plus, you're covering actual costs as they occur rather than a predetermined contract sum, so the lender may require more frequent valuations and detailed invoices from plumbers, electricians, and other trades before releasing funds. This can increase the number of progress inspections and add to your overall Progressive Drawing Fee, which is charged each time funds are released.

Interest-Only Repayment Options During Construction

Most construction loans offer interest-only repayment options while the build is underway. You're not required to pay down the principal until the home is finished and the loan converts to a standard home loan structure. This keeps your monthly commitments lower during a period when you're often still paying rent or managing other housing costs.

Once the build reaches practical completion and you've settled into the property, the loan typically converts to a construction to permanent loan. At that point, you can choose to continue with interest-only repayments for an agreed period or move to principal and interest repayments. The conversion happens automatically with most lenders, though you'll want to confirm the interest rate structure at that stage, especially if you started the build on a variable construction loan interest rate and want to lock in a fixed rate post-completion.

Some lenders allow additional payments during construction without penalty, which can reduce the balance before the loan converts and lower your long-term interest costs. If you receive a bonus, tax return, or sale proceeds from another property during the build, putting that toward the loan can cut months off the eventual repayment term once construction wraps up.

Progressive Payment Schedule and Builder Requirements

The progressive payment schedule isn't just about when the lender releases funds. It also dictates when the builder gets paid, which affects their cash flow and willingness to take on the project. A registered builder working in the Narellan area will expect a payment structure that aligns with industry norms and covers their costs at each stage without them fronting significant capital.

Most fixed price contracts stipulate that the builder receives a deposit upfront, usually around 5% to 10% of the contract price, followed by progress payments at each stage. The final payment, often 5%, is held back until all defects are rectified and you've signed off on practical completion. The lender's progress inspection process protects you by ensuring the builder has actually completed the work claimed before funds are released, but it also means the builder needs to wait for that inspection and approval before receiving payment.

If you're building a custom home with detailed specifications or working on a house renovation loan for a knock-down rebuild, the payment schedule may include additional stages to account for specialised trades or imported materials. The contract should specify whether progress payments cover only completed work or also include materials delivered to site. Some builders request payment for materials on delivery, but lenders typically won't release funds until those materials are installed and verified during inspection.

Land and Build Loan vs House and Land Package Structures

A land and build loan is structured differently depending on whether you're buying suitable land separately and then engaging a builder, or purchasing a house and land package from a developer. With a package, the land component is often settled first, and the construction loan is activated once you commence building within a set period from the Disclosure Date specified in the contract.

In areas like Narellan and nearby Harrington Park, house and land packages are widely available through volume builders who offer project home loan arrangements with fixed timelines and locked-in pricing. The land purchase is funded first, sometimes through a separate land loan that rolls into the construction facility, or as part of a combined approval. Once the land settles, the construction phase begins, and the lender starts the progressive drawdown process based on the builder's schedule.

If you're purchasing land independently and engaging a custom builder, you'll need council plans and building approval in place before the construction loan is activated. The lender will require a copy of the development application approval, the building contract, and evidence that all conditions have been met before releasing the first drawdown. This process can take several weeks, so timing the land settlement and construction start date is important to avoid holding costs on the land while waiting for approvals.

Fees and Costs Specific to Construction Funding

Construction funding comes with fees that don't apply to standard home loans. The most common is the Progressive Drawing Fee, charged each time the lender releases funds to the builder. This fee typically ranges from $200 to $400 per drawdown, depending on the lender and whether they use an in-house valuer or a third-party inspector.

Over a typical five-stage build, you could pay $1,000 to $2,000 in drawing fees alone. Some lenders cap the number of drawdowns or offer a fixed fee structure for the entire construction period, which can reduce costs if your build requires more stages than usual. If you're working as an owner builder or managing a renovation project with multiple trades, the number of drawdowns can increase, and so do the associated fees.

Other costs include valuation fees for the initial land purchase and again at practical completion, legal fees for reviewing the building contract, and potentially higher interest rates during the construction phase compared to standard variable or fixed rates. Some lenders apply a margin to their construction loan interest rate to account for the additional risk and administration involved in progress payments and inspections.

What Happens If You Can't Commence Building on Time

Most construction loan approvals require you to commence building within a set period from the Disclosure Date, often six to twelve months. If council approval is delayed, the builder's schedule slips, or you decide to change the design after approval, you may not meet that deadline. When that happens, the lender may extend the approval, but they'll reassess your financial position, revalue the land, and potentially adjust the loan terms or interest rate based on current market conditions.

In Narellan, where new estates are still being developed and council approval timelines can vary depending on the stage of infrastructure works, delays aren't uncommon. If you're building in a new release area, factor in extra time for DA approval and any conditions related to road access, drainage, or utility connections. Lenders understand these delays but will want evidence that the build is progressing and that you're still in a position to service the loan once construction is underway.

If the delay extends beyond the lender's comfort zone or your financial situation changes during the waiting period, the approval may lapse, and you'll need to reapply. That's why locking in council plans, engaging a registered builder early, and keeping the lender informed of any timeline shifts can prevent approval issues down the line.

Construction finance gives you the flexibility to build your dream home on your terms, but it also requires more active management than a standard purchase loan. Understanding how progressive drawdowns work, what fees apply, and how the payment schedule aligns with your builder's contract puts you in a stronger position to manage costs and timelines from land purchase through to completion. Call one of our team or book an appointment at a time that works for you to discuss your construction loan options and get clarity on the structure that suits your build.

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