Settlement on a construction loan happens in stages, not all at once.
You draw funds progressively as the build reaches specific milestones. Each release is triggered by a progress inspection, and you only pay interest on what's been drawn down. The final settlement occurs when the build is complete and you convert to a standard mortgage.
When the First Drawdown Occurs
The first drawdown usually happens at practical commencement, which is when your builder starts work on site. This typically covers the initial deposit to the builder, often 5% to 10% of the contract price. The lender will require proof that council approval is in place and that your registered builder has the necessary insurance before releasing this payment.
Consider a scenario where a lecturer purchasing in a regional area has secured a fixed price building contract for a custom design. The builder requires a 5% deposit at commencement. The lender inspects the site, verifies the council plans, and releases that first portion. From that point, interest starts accruing on the drawn amount only.
How the Progress Payment Schedule Works
Your lender follows a progressive drawdown schedule aligned with construction milestones. Typical stages include base stage, frame stage, lock-up stage, fixing stage, and practical completion. Each stage must be inspected and signed off before the next payment releases.
The builder submits a claim once they reach a stage. The lender arranges a progress inspection, usually charging a Progressive Drawing Fee for each one. If the inspector confirms the stage is complete, the lender releases the funds directly to the builder. You don't handle the money yourself.
In our experience, builders often submit claims slightly ahead of completion to maintain cash flow. If the inspector flags incomplete work, the drawdown is delayed until the issue is resolved. This protects you from paying for work that hasn't been done.
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Interest Charges During Construction
You only pay interest on the amount drawn down at any given time. If the contract is for $500,000 and you've drawn $150,000, interest accrues on $150,000. Most lenders offer interest-only repayment options during the construction phase, meaning you're not paying down principal until the build is finished.
This structure keeps repayments lower while the property generates no income and you may still be paying rent elsewhere. Once construction is complete, the loan converts to principal and interest repayments unless you've arranged otherwise.
What Happens at Practical Completion
Practical completion is when the builder hands over the property. The final drawdown occurs after the lender's inspector confirms the build meets the contract specifications and any defects have been rectified. This final payment closes out the construction phase.
At this point, the loan converts from construction funding to a standard mortgage. You move from interest-only payments on drawn amounts to regular repayments on the full loan amount. If you've arranged a construction to permanent loan, this conversion happens automatically. If not, you'll need to refinance or finalise the facility as agreed with your lender.
For academics with fixed-term contracts or those returning from sabbatical, timing this conversion to align with income changes can matter. If your financial position has shifted since the original construction loan application, the conversion may require updated income verification. Lenders assess this differently, so understanding your lender's process before practical completion avoids surprises. Depending on your circumstances, you may want to explore options through a construction loan specialist who understands staged funding.
What Triggers a Delayed Drawdown
Drawdowns delay when inspection reports identify incomplete work, when the builder submits claims early, or when documentation is missing. A common example is the plumber or electrician not completing rough-in work before the builder claims the frame stage. The inspector won't sign off, and the drawdown won't release.
Another trigger is a cost plus contract where the builder hasn't provided receipts or invoices to substantiate the claim. Fixed price contracts are more straightforward because the payment is tied to the milestone, not the receipts. With cost plus, the lender needs proof of what's been spent.
Delays can also occur if you don't commence building within a set period from the Disclosure Date. Some lenders require construction to start within six months of loan approval. If it doesn't, you may need to reapply or provide updated financials.
Managing Cash Flow Between Stages
Your builder may request payment before the lender releases funds. This happens when the builder uses their own cash to keep the project moving and expects reimbursement once the inspection clears. Most builders have working capital to cover this gap, but smaller operators may push for faster approvals.
If you're managing owner builder finance, you're responsible for coordinating payments to sub-contractors directly. This means ensuring funds are available when the electricians or plumbers finish their portion of work, even if the lender hasn't released the next stage yet. This requires more active cash flow management and a buffer in your offset or savings account.
The alternative is to negotiate a progress payment finance arrangement with your builder that aligns drawdowns with their payment schedule. Not all builders offer this flexibility, but it's worth discussing during contract negotiations. If you're considering a house and land package, the developer often coordinates the builder relationship, which can simplify this process.
Converting to Your Permanent Loan
Once the final inspection is complete and the property is habitable, your lender will convert the facility to a standard home loan. This involves a formal valuation of the completed property, not just the land and contract value. The valuation confirms the property is worth what you've borrowed.
If the valuation comes in lower than expected, you may need to contribute additional funds to meet the lender's loan-to-value ratio requirements. If it comes in higher, you've built instant equity. Either way, the lender uses this figure to finalise your ongoing loan structure.
Interest-only repayment options may continue if you've set the loan up that way, but most academics prefer to switch to principal and interest to start reducing the debt. If your income has changed or you're planning to use the property as an investment, now is the time to review your structure with a broker who understands your sector. Some lenders allow you to lock in a portion of the loan at a fixed rate during this conversion, while others require you to stay variable until settlement is complete. Understanding your lender's policies at the outset helps you plan.
Call one of our team or book an appointment at a time that works for you to discuss how construction funding fits your situation and what to expect at each stage.
Frequently Asked Questions
When does the first drawdown happen on a construction loan?
The first drawdown typically occurs at practical commencement when your builder starts work on site. This usually covers the initial deposit to the builder, often 5% to 10% of the contract price, and requires proof of council approval and builder insurance before releasing.
Do I pay interest on the full loan amount during construction?
No, you only pay interest on the amount drawn down at any given time. Most lenders offer interest-only repayments during construction, which keeps repayments lower while the property is being built and you may still be paying rent elsewhere.
What happens at practical completion of a construction loan?
At practical completion, the builder hands over the property and the final drawdown occurs after the lender's inspector confirms the build meets contract specifications. The loan then converts from construction funding to a standard mortgage with regular repayments on the full amount.
What can delay a construction loan drawdown?
Drawdowns delay when inspection reports identify incomplete work, when builders submit claims early, or when documentation is missing. Common issues include incomplete rough-in work by plumbers or electricians, or missing receipts on cost plus contracts.
How does the progress payment schedule work?
The lender follows a progressive drawdown schedule aligned with construction milestones like base, frame, lock-up, fixing, and practical completion. Each stage must be inspected and signed off before the next payment releases directly to the builder.
