What Not to Manage When Building: Construction Loans

Managing a construction loan means coordinating payments to your builder as work progresses, not handing over a lump sum upfront.

Most people think about getting approved for construction finance, but the real work starts once the loan settles and building begins. Unlike a standard home loan where you receive the full amount at settlement, construction funding is released in stages as specific milestones are completed. Each payment, called a progress draw or progressive drawdown, is triggered by an inspection that confirms the work matches what your builder has invoiced. Managing this process well keeps your build moving and your budget intact.

How Construction Draw Schedules Actually Work

A construction draw schedule breaks your loan amount into instalments tied to building milestones, typically five to seven stages from slab to completion. Your lender pays your builder directly after a qualified inspector confirms each stage is finished to an acceptable standard. The schedule is set out in your loan contract and linked to your fixed price building contract, so both your builder and your lender know what to expect.

Consider a scenario where you're building a custom home in Kingston. Your lender might release the first draw once the slab is poured and passed inspection, often around 15% to 20% of the total build cost. The second draw follows when the frame is up and the roof is on, usually another 20% to 25%. Each subsequent stage covers rough-in work like plumbing and electrical, then fit-out, and finally completion. Until each draw is released, you only pay interest on the amount already drawn down, not the full loan.

What Happens Between Approved Stages

Your builder submits a payment claim when they believe a stage is complete. Your lender arranges an inspection, usually within a few business days, and the inspector checks that the work matches the claim. If everything aligns, the lender releases the funds directly to the builder's account. If the inspector identifies incomplete or substandard work, the draw is held until the builder rectifies the issue and requests a re-inspection.

This is where delays can occur. If your builder moves ahead to the next stage before the current draw is released, they're funding that work themselves. Some builders can manage this, but others slow down or stop until payment comes through. Staying in contact with both your builder and your lender during each stage helps you spot hold-ups early. In our experience, most issues come from minor paperwork mismatches or incomplete finishes that take a day or two to fix, not major construction faults.

Interest Charges and Progressive Payment Fees

You only pay interest on the portion of the loan that's been drawn down, not the approved amount sitting undrawn. During construction, most lenders offer interest-only repayment options, meaning you're not paying down the principal until the build is finished and the loan converts to a standard home loan. This keeps your repayments lower while you might still be paying rent or covering costs elsewhere.

Lenders also charge a Progressive Drawing Fee or Progress Payment Fee each time they arrange an inspection and release funds. This fee typically sits between $300 and $500 per draw, depending on the lender and the location of your build. If your build has six stages, expect to pay somewhere between $1,800 and $3,000 in drawing fees over the course of construction. These fees are usually deducted from each draw before funds reach the builder, so you don't pay them separately.

Fixed Price Contracts and Cost Plus Contracts

Most construction loans require a fixed price building contract, where your builder agrees to complete the project for a set amount. This gives your lender certainty about the total cost and makes the progress payment schedule straightforward. Each stage corresponds to a percentage of that fixed price, and the lender knows exactly how much to release at each point.

Some lenders will consider cost plus contracts, where you pay the builder's actual costs plus a margin, but these are less common and typically require more documentation. Owner builder finance is also available, though fewer lenders offer it and those that do usually ask for detailed cost breakdowns, council plans, proof that you've engaged licensed sub-contractors like plumbers and electricians, and evidence of relevant building experience. If you're planning an owner-builder project in Tasmania, expect the lender to want a clear picture of how you'll manage the build before approving the loan.

What to Do If Your Build Runs Over Budget

If your builder identifies a variation or unforeseen cost partway through, they'll usually issue a variation order for you to approve. Once approved, this changes the contract price, but your loan amount stays the same unless you apply to increase it. Applying for additional funds mid-build is possible, though it depends on your equity position and whether the higher valuation supports the new loan amount.

In a scenario like this, a couple building in Riverside discovered that their soil required additional engineering after the slab stage. The variation added $12,000 to the build cost. They had enough equity in the land to request a loan increase, which the lender approved after a desktop valuation. The revised draw schedule then reflected the higher contract price, and the remaining stages were adjusted accordingly. Without the equity buffer, they would have needed to cover the variation from savings or negotiate a reduction elsewhere in the build.

Development Application and Council Approval Timing

Your lender will want to see council approval and a development application before they'll settle your construction loan. Most loan contracts also require you to commence building within a set period from the Disclosure Date, often six or twelve months. If approvals take longer than expected or your builder's schedule slips, you might need to request an extension from the lender to avoid the loan offer expiring.

This is particularly relevant in regional areas like Devonport or Launceston, where council processing times can vary depending on the complexity of the design and local planning overlays. If your project involves a custom design or sits in a bushfire-prone or flood-affected zone, expect the approval process to take longer and factor that into your timeline.

When the Build Finishes and the Loan Converts

Once construction is complete and you've received your occupancy certificate, the loan converts from a construction facility to a standard home loan. At this point, your repayments shift from interest-only on the drawn amount to principal and interest on the full loan. Your construction loan interest rate, which may have been slightly higher than a standard variable rate during the build, usually moves to your lender's standard variable or fixed rate depending on what you've chosen.

Some lenders offer a construction to permanent loan, where the rate and terms are locked in from the start. Others treat the construction phase and the ongoing loan as two separate stages, meaning you might need to reapply or accept whatever rate is current when the build finishes. Clarifying this upfront avoids surprises later.

Call one of our team or book an appointment at a time that works for you. We'll walk through your building contract, explain how each draw will work, and make sure your construction funding is set up to support your build from slab to handover.

Frequently Asked Questions