Construction Loans: How Progress Payments Work

Key takeaways

• Interest accrues only on drawn funds, so early costs are low and rise through the build.
• The standard stages are deposit, base, frame, lock-up, fixing and completion.
• Most lenders require a fixed-price contract from a licensed builder.
• Variations are usually funded by you, not the loan - budget for them separately.

The standard drawdown stages

Percentages vary by builder and contract. Use the schedule in your own building contract rather than a generic one.

What interest actually costs during the build

On $400,000 of land drawn at settlement plus a $600,000 build over ten months at 7.5%, interest during construction totals roughly $44,700 - against about $62,500 if the whole facility were drawn from day one. The staged drawdown saves around $17,800.

You will usually be paying that interest while also paying rent or an existing mortgage. That overlap is the most common cash-flow surprise in a build, and it is entirely predictable - so budget for it.

The risks lenders care about

• Builder solvency. Insolvencies have left owners with half-finished homes and drawn loans. Check the builder's licence, history and insurance.
• Cost escalation. A fixed-price contract protects you against most of it - read what is excluded.
• Variations. Changes you request mid-build are usually funded from your own pocket, not the loan.
• Delays. Interest keeps accruing on drawn funds, and some facilities have a hard expiry.
• On-completion valuation. If the finished property values below expectations, your LVR rises and the lender may require more equity.

Frequently asked questions

Do I make full repayments during construction?

Usually interest-only on the drawn balance, converting to principal and interest at practical completion. Some lenders capitalise the interest into the loan instead.

What if my builder goes under mid-build?

Domestic building insurance (called different names by state) provides some cover, and the lender will stop further draws. It is disruptive and expensive, which is why builder due diligence matters more than the rate.

Can I do an owner-builder construction loan?

Some lenders allow it, at lower LVRs and with more documentation, because there is no builder's warranty and no fixed-price contract. Many decline it outright.

Related reading

• The Home Loan Repayment Formula, Worked Step by Step
• Mortgage Prisoners: When You Cannot Refinance
• Refinancing Your Home Loan: The Complete 2026 Process

Sources

• Building and renovating — ASIC Moneysmart
• Building activity, Australia — Australian Bureau of Statistics