Proven Tips to Understand Construction Loan Features

What Makes a Construction Loan Different From a Regular Home Loan

A construction loan releases funds in stages as your build progresses, not as a single lump sum upfront. You only pay interest on what's been drawn down at each stage, which means your repayments start lower and increase as more money gets released to your builder.

Most lenders charge what's called a Progressive Drawing Fee each time they inspect the site and release funds. This typically ranges from $300 to $800 per drawdown depending on the lender, and you'll usually have between four and six drawdowns across the entire build. Some lenders let you capitalise these fees into the loan so you're not paying them out of pocket during construction.

The loan converts to a standard home loan once construction finishes and you receive practical completion from your builder. At that point, you start repaying principal and interest on the full amount, or you can continue with interest-only if your lender allows it and it suits your situation.

How the Progressive Drawdown Schedule Actually Works

Your builder submits a claim to the lender when they hit certain construction milestones, usually tied to slab down, frame up, lock-up, fixing stage, and practical completion. The lender arranges an inspection, and once they're satisfied the work is done, they release that portion of funds directly to the builder.

Consider a scenario where you're building in Perth's northern suburbs with a fixed price building contract for $450,000. Your first drawdown might be $90,000 at slab stage, which is typically around 20% of the build cost. You'll only pay interest on that $90,000 until the next stage is complete. When frame-up happens a few weeks later and another $135,000 is released, you're then paying interest on $225,000 total.

The timing between drawdowns depends entirely on how quickly your builder moves through each phase. A project home with a registered builder on suitable land with all council approvals in place might move through stages every four to six weeks. Custom builds or renovations can take longer between claims, particularly if there are design changes or material delays.

Interest-Only Repayments During the Build Phase

Most construction loans automatically put you on interest-only repayments while building is underway. This keeps your repayments lower during a period when you might still be paying rent or covering your existing mortgage if you haven't sold yet.

The interest rate during construction is usually variable, even if you plan to fix your rate once the build is complete. Lenders generally won't lock in a fixed rate until the loan converts to a standard mortgage after practical completion. You'll see the rate quoted as something like "at current variable rates" in your loan documents, and it will move up or down with the market while you're building.

Some people assume they'll save money by making additional payments during construction to reduce the loan balance early. Most construction loans allow this, but it only makes sense if you've got surplus cash sitting around. If you're stretched covering two housing costs or managing the build budget, keeping that cash accessible usually makes more sense than paying down a loan that's already on interest-only terms.

What Happens if Your Build Goes Over Budget

Fixed price contracts are meant to protect you from cost blowouts, but they don't cover everything. Variations you request, site costs that weren't included in the original contract, or items listed as provisional sums can all push the final cost higher than your approved loan amount.

Lenders assess your borrowing capacity based on the land value plus the contracted build price. If your builder comes back midway through with variation costs and you need another $25,000, you'll need to apply for a loan increase. The lender will reassess your income and expenses at that point, and there's no guarantee they'll approve the extra funds if your financial situation has changed.

In our experience, most budget issues arise from underestimating site costs on sloping blocks or not factoring in retaining walls, driveways, and landscaping. If you're building on land that needs significant earthworks or has access issues, ask your builder and your broker to help you budget for those items before you lock in your loan amount.

Land and Construction Packages vs Buying Land First

A land and construction package means you're buying the land and contracting the build at the same time, usually with a project builder who has an existing relationship with the developer. The advantage is that everything is coordinated and you can often lock in both the land price and the build price before settlement.

The main thing to know is that most lenders require you to commence building within a set period from the disclosure date, usually 12 months. If you settle on the land and then spend six months finalising your house design or waiting for council plans, you might run up against that deadline. Some lenders are more flexible than others on construction start timeframes, particularly if delays are due to council approval processes outside your control.

Buying land first and arranging the build separately gives you more time to choose your builder and finalise your design, but it means two separate loan processes. You'll need to either pay cash for the land or take out a land loan that then gets refinanced into a construction loan once you're ready to build. The refinance adds another round of applications and valuations, but it can be worth it if you want more control over the design and builder selection.

Fixed Price Contracts and Progress Payment Schedules

A fixed price building contract locks in the build cost and sets out a progress payment schedule that tells you and the lender exactly when funds need to be released. The contract should list each stage, the percentage of the total build cost due at that stage, and what work needs to be completed before that payment is made.

Most registered builders in Perth use a standard schedule based on Housing Industry Association or Master Builders Association templates. These schedules are designed to protect both you and the builder by making sure payments align with work completed, not work promised.

A cost-plus contract is less common for residential builds but it does come up with custom homes or owner builder finance. Under this structure, you pay the builder for actual costs plus an agreed margin, which means the final price isn't locked in from the start. Lenders are more cautious with cost-plus arrangements and some won't touch them at all. If you're going down that path, expect the lender to scrutinise the builder's quotes and possibly require a larger contingency buffer in your loan amount.

Renovation Finance and How It Differs From New Builds

Renovation loans work on the same progressive drawdown model, but lenders treat them differently because there's an existing property involved. The valuation needs to account for the current value plus the expected value after renovation, and the lender will cap your loan based on a percentage of that end value.

Consider a scenario where you own a home in Mandurah worth $500,000 and you want to add a second storey for $200,000. The lender will order a valuation that estimates the post-renovation value, let's say $750,000. They'll typically lend up to 80% of that figure, which is $600,000. If you still owe $300,000 on your current mortgage, you can borrow up to $300,000 for the renovation without needing lender's mortgage insurance.

The drawdown process is the same as new construction, with progress inspections at each stage before funds are released. The difference is that you're usually living in the property while work happens, which means coordinating access and managing disruption. Some lenders want to see a fixed price contract with a licensed builder, while others will consider owner builder arrangements if you've got trade qualifications and experience.

How to Know if Your Builder and Contract Will Be Accepted

Lenders want to see a registered builder with appropriate insurance, a fixed price contract that's signed by both parties, and evidence that all council approvals are either in place or will be in place before construction starts. Most won't release the first drawdown until they've sighted the building permit and confirmed the builder's insurance covers the full contract value.

If you're acting as an owner builder, your loan options narrow significantly. Some lenders will consider it if you're a qualified tradesperson with a track record of completing builds, but even then they'll often require a larger deposit and charge a higher interest rate to offset the perceived risk. You'll also need to provide detailed quotes from all sub-contractors and a project management plan that shows you understand how to coordinate plumbers, electricians, and other trades through the build.

Project homes from volume builders are usually the smoothest path through the approval process because the lender is familiar with the builder, the contract is standardised, and the build timeline is predictable. Custom designs take more scrutiny but they're absolutely manageable as long as the plans are clear, the builder is licensed, and the contract price is realistic for what's being built.

If you're not sure whether your builder or contract will meet lender requirements, it's worth running it past a broker before you sign anything. We regularly see contracts that look fine on the surface but have clauses or provisional sums that create problems during the approval process. Catching those early saves time and avoids the awkward conversation with your builder about renegotiating terms after you've already committed.

Call one of our team or book an appointment at a time that works for you. We'll walk through your build plans, work out which lenders suit your situation, and make sure your loan structure lines up with how your builder operates.

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