What Not to Do When Settling a Construction Loan

Construction loan settlement works differently to a standard home loan because you're not getting one lump sum upfront.

Instead, funds are released in stages as your build progresses, with each payment triggered by a specific milestone. The first settlement happens when you buy the land, and then subsequent payments are drawn down as the frame goes up, the roof locks on, and the fit-out completes. Each of those payments needs to be approved by your lender's valuer, which means timing becomes critical. If your builder submits a claim before the work is actually complete, or if the valuer picks up defects, your drawdown gets delayed and so does your builder.

That's the bit most people don't plan for, and it's where builds in areas like Oran Park, Leppington, and Gregory Hills tend to slow down.

The Two Settlements You'll Actually Go Through

You settle twice: once on the land, and once on the construction contract, though the second part happens in stages.

When you settle on the land, it works like any other property purchase. You pay stamp duty, transfer the title, and the lender releases the land portion of your loan. From that point, you own the block and you're paying interest on whatever was drawn down to buy it. The construction portion of your loan sits there untouched until the builder is ready to start. Once the slab goes down, your builder lodges the first progress claim, the lender sends a valuer out to confirm the work, and then the first construction drawdown is released. That continues every time the build hits a new stage, usually five or six times depending on your contract. Each time, the valuer needs to sign off before the money moves.

If you're buying a land and build package in South West Sydney, expect council approval to take anywhere from eight to fourteen weeks depending on the shire. Liverpool and Camden councils both run different timeframes, and if your block needs a detention tank or additional stormwater conditions, that timeline stretches further.

What Triggers Each Progress Payment

Progress payments are released when your builder completes a stage and submits a claim to your lender.

Most fixed price building contracts break the build into five stages: base stage (slab and footings), frame stage, lock-up stage (roof, windows, exterior complete), fixing stage (plasterboard, internal fit-out), and practical completion. Your builder will submit an invoice at the end of each stage, your lender will send a valuer to confirm the work matches the claim, and then the funds get released directly to the builder. The valuer isn't there to check quality, they're checking progress. If your builder claims 80% complete but the valuer assesses it at 70%, the drawdown gets adjusted and your builder waits for the difference.

Consider a buyer building a double-storey home in Gledswood Hills. The frame stage was meant to trigger a drawdown in late September, but the builder submitted the claim two weeks before the second-storey frame was actually up. The valuer attended, saw the ground floor complete but the upper level still in progress, and only approved a partial release. The builder had already scheduled the roof trusses based on receiving full payment, so the delay pushed the lock-up stage back by three weeks. That flow-on meant the owner was paying interest on the land for an extra month without the build moving forward.

Interest Only Gets Charged on What's Been Drawn Down

You only pay interest on the amount the lender has released so far, not the full loan amount.

If your total loan is $650,000 and you've drawn down $200,000 for the land and $120,000 for the base and frame stages, you're only paying interest on $320,000. As each stage completes and more funds are released, your interest cost increases. Most lenders offer interest-only repayment options during construction, which means you're not paying down any principal until the build finishes and the loan converts to a standard home loan. That keeps your repayments lower while you're also covering rent or another mortgage, but it also means your loan balance doesn't reduce until the build is done.

Some lenders charge a progressive drawing fee each time a drawdown is processed, usually between $300 and $400 per claim. Over five or six stages, that adds up to around $2,000 in fees that sit outside your loan amount. Not all lenders charge this, so it's worth comparing construction loan application terms before you commit.

The Valuation Delay That Holds Up Your Builder

Valuations are meant to happen within a few days of the builder's claim, but in reality they can take a week or more.

Lenders typically allow three to five business days for the valuer to inspect and report back, but if the valuer is covering a large area or if the claim lands during a busy period, that timeframe blows out. Once the report is in, the lender's credit team needs to review it and approve the drawdown, which adds another couple of days. If the valuer identifies incomplete work or a defect, the builder has to rectify it and request a re-inspection, which starts the process again. In South West Sydney, where multiple estates are under construction at the same time, valuer availability can be tight, especially around Marsden Park, Austral, and Catherine Field.

In our experience, buyers who stay in contact with both their builder and their broker during the construction phase tend to have fewer delays. If you know a claim has been submitted, you can prompt your broker to follow up with the lender, and the broker can escalate if the valuation is overdue.

What Happens If Your Builder Goes Over Budget

If your build costs more than the contracted price, the lender won't automatically cover the difference.

Most lenders approve your construction loan based on the fixed price building contract you provide at application. If your builder comes back mid-build with a variation, say for upgraded flooring or a change to the roofline, that's not automatically funded. You'll either need to pay the variation upfront in cash, or apply for a loan top-up, which requires another credit assessment. If the variation pushes your loan-to-value ratio too high, the lender may decline the top-up altogether. That's more common with owner builder finance, where the contract is often a cost-plus agreement rather than a fixed price, and the final cost isn't locked in at the start.

If you're planning to build under a cost-plus contract, make sure your lender is comfortable with that structure before you get too far in. Not all lenders will approve cost-plus builds, and the ones that do often require a larger deposit or restrict the loan amount to a percentage of the estimated cost rather than the final build price.

The Funding Gap Between Land Settlement and Construction Start

Most construction contracts require you to commence building within a set period from the disclosure date, but council approval and site prep can delay that.

Once you settle on the land, you're paying interest on that portion of the loan even if the builder hasn't started yet. If council approval takes twelve weeks and the builder needs another four weeks to schedule the slab pour, you're covering sixteen weeks of interest before the first construction drawdown happens. At current variable rates, that can add up quickly. Some buyers try to delay land settlement until council approval is through, but that only works if the vendor agrees to a longer settlement period, and in high-demand estates across South West Sydney, vendors aren't usually flexible on timing.

If you're buying a house and land package from a developer, check whether the contract links land settlement to DA approval or to a fixed date. Some developers will push land settlement through as soon as the title is registered, regardless of whether your development application has been submitted yet. That leaves you holding the land and paying interest while the approvals process plays out. The alternative is to negotiate a clause that ties settlement to DA approval, though not all developers will accept that.

How the Loan Converts Once Construction Finishes

When the build reaches practical completion, your construction loan converts to a standard home loan and principal-and-interest repayments begin.

Practical completion means the build is finished to a liveable standard, even if minor defects or landscaping are still outstanding. Your builder will issue a certificate, the final drawdown is released, and your lender switches your loan from interest-only construction funding to a regular principal-and-interest repayment schedule. Your interest rate may also change at this point if your construction loan was on a different rate to the revert rate. If you started the build on a fixed construction loan interest rate, check what rate it converts to once the build is done, because some lenders revert to a higher variable rate unless you refix or refinance.

If you're planning to build a custom home with a registered builder in an area like Horningsea Park or Denham Court, lock in your construction loan structure early. Rates and policies shift, and locking in your approval gives you certainty on what your repayments will look like once the build converts. If you want to explore construction loans that suit your build timeline, or if you're weighing up a land and construction package against buying an existing property, that conversation is worth having before you sign anything.

Call one of our team or book an appointment at a time that works for you.

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