Why Construction Loan Features Matter Before You Build

A construction loan pays your builder in stages, and the way it does that shapes your costs for the whole build.

If you are planning a new home in Riverside, the loan features matter as much as the rate. Staged payments, interest on the drawn amount and what happens at completion all affect your cash flow. This guide walks through each one in plain language.

How Does a Construction Loan Work?

A construction loan releases money in stages as your builder completes work, instead of paying the full amount at settlement. Interest is usually charged only on the amount drawn so far, so repayments start small and grow as the build moves ahead.

This suits building because the bank is lending against a home that does not yet exist. Each release is tied to a stage of the build. Our construction loans page covers the basics if you are still comparing options.

Progressive Drawdown: How Interest Builds During the Build

With a progressive drawdown, you pay interest only on the money that has been released. Your repayments rise with each stage and are highest once the loan is fully drawn. The repayment type during the build depends on the lender, so confirm it with yours.

As an example, consider a buyer with a $400,000 construction loan. The numbers below use an illustrative rate of 6.75% p.a. and are not a quote.

• After the first release takes the balance to $100,000, monthly interest is about $562.50.
• At $300,000 drawn, it is about $1,687.50.
• Fully drawn at $400,000, it is $2,250 a month.

Once the build is finished, the loan can move to principal and interest. At the same illustrative rate over 30 years, the repayment on $400,000 would be about $2,594 a month, assuming the rate does not change and excluding fees. Repayments during the build rise as funds are drawn, so it is wise to budget for the higher fully drawn repayment and to confirm the repayment type with your lender.

Your lender will also test whether you could afford repayments at a rate 3 percentage points above the loan rate. Our borrowing capacity page helps you estimate where you stand before you apply.

What Is a Progress Payment Schedule and Who Sets It?

A progress payment schedule lists the stages at which your builder can claim money, such as base, frame and lock-up. In Tasmania, you and your builder can agree the number and timing of payments, but each payment must match the value of work done.

Tasmanian rules also set limits for residential building contracts:

• The maximum deposit is 5% for contracts of $50,000 or more.
• It can be up to 20% where off-site work is more than half of the total price.
• A builder cannot ask for more than 50% of the contract price until at least half the work is complete.

The lender follows your contract. If your schedule asks for money earlier than the build justifies, expect questions from the bank. Ask your lender how many drawdowns it allows, because that varies between lenders.

Fixed Price Building Contract or Cost Plus: Which Suits Your Loan?

A fixed price building contract sets the total cost up front, while a cost plus contract charges actual costs plus the builder's margin. Fixed price makes loan sizing more predictable, and cost plus can leave you exposed if costs rise.

Some lenders may find a fixed price contract easier to assess. The trade-off is that changes after signing, called variations, can be costly, and you may need extra funds to cover them. With cost plus, ask your lender early how it treats a contract that has no set total.

Progress Inspections and Fees to Ask About

Inspection requirements and fees vary by lender, so ask for them in writing. The same goes for the inspection process and the time taken to release funds.

If your lender charges a fee for each release and your build has six stages, those fees can add up, so factor them in alongside the interest rate. Delays matter too. Builders must pay sub-contractors such as plumbers and electricians, so slow releases can hold up the job. A lender with a quick turnaround can be worth more than a small difference in rate.

Construction to Permanent Loan: What Happens at Completion

A construction to permanent loan moves your loan into a standard home loan once the build is complete. This avoids setting up a second loan, and your repayments then change to the ongoing arrangement.

Before you sign, check how long the lender allows for the build and what happens if it runs late. Also check whether your repayment type changes at completion, and whether you can switch to a different loan later. If you are buying land with a builder's package, our house and land packages page explains how that structure works with finance.

Preparing Your Construction Loan Application

A strong construction loan application includes your signed building contract, council or development approval and plans, and evidence of your income and savings. Lenders usually need these documents, but timing differs by lender. Confirm with your lender when approval is needed, as it may be before loan approval or before the first drawdown.

Use a licensed builder, and check the CBOS licence register. If you are buying your first home, our first home buyers page covers grants and schemes. Check the Tasmanian first home owner grant rules before you sign, because eligibility depends on the contract and timing.

A broker can also compare construction finance from banks and lenders across Australia and match the loan features to your build, rather than just the lowest advertised rate. Your loan should fit your contract, your cash flow and your timeline.

Call one of our team or book an appointment at a time that works for you, and we will map out your drawdowns before you commit to a builder.

Frequently Asked Questions