Smart ways to approach construction loan features

How construction loans charge interest differently

You only pay interest on funds as they're drawn down, not the full approved amount from day one.

Consider someone building in Kingston who has a $650,000 construction loan approved. During the slab stage, they might have drawn $150,000. Interest applies to that $150,000, not the full loan amount. When the frame goes up and another $180,000 is released, interest applies to the combined $330,000. This structure means your repayments start lower and gradually increase as more funds are drawn. Most lenders offer interest-only repayment options during construction, which keeps costs down while you're managing rental payments or a mortgage elsewhere. Once the build completes, the loan converts to a standard home loan with principal and interest repayments.

Fixed price building contracts and how they affect approval

Lenders prefer fixed price contracts because they know exactly what the build will cost.

A fixed price building contract locks in the total amount your builder will charge, which gives lenders confidence when approving construction funding. In Kingston, where builds often sit between knockdown-rebuilds on established blocks and new house and land packages near Greenway, having this certainty matters. If you're working with a cost plus contract instead, where the builder charges for actual costs plus a margin, expect lenders to add a larger buffer and possibly reduce how much they'll lend. Some lenders won't touch cost plus arrangements at all. The contract needs to show a clear breakdown of stages, what triggers each progress payment, and when you need to commence building from the approval date. Most lenders require building to start within six to twelve months of loan settlement.

Progressive drawdown and the inspection process

Funds release in stages after an inspector confirms each phase is complete.

The typical progress payment schedule works like this: deposit on signing, slab payment once the base is laid, frame payment when the structure is up, lockup when the roof and windows are in, fixing when internal work like plumbing and electrical is done, and final payment at practical completion. Before each payment, either the lender's panel valuer or an independent inspector visits the site to verify the work matches what's being claimed. If the inspector finds the frame stage is only 80% complete but your builder has requested the full frame payment, the lender will hold back funds until the work is finished. This protects you from paying for incomplete work and ensures sub-contractors like plumbers and electricians get paid when they're supposed to. The inspection and release process usually takes three to five business days, so builders need to factor that timing into their schedules.

How the progressive drawing fee works

Most lenders charge a progressive drawing fee each time funds are released.

This fee typically sits between $300 and $500 per drawdown and covers the cost of sending someone to inspect and verify the work. Over a standard five or six stage build, you're looking at $1,500 to $3,000 in total fees. Some lenders cap the number of free drawdowns and charge for anything beyond that, while others charge from the first release. A handful of lenders include inspections in their overall loan package without separate fees, but they're not common. If you're doing an owner builder project rather than using a registered builder, expect these fees to be higher and drawdown stages to be more frequent, since lenders monitor owner builds more closely.

Land and construction packages versus separate purchases

Buying land and arranging construction under one loan application often makes funding smoother.

In a land and construction package, the lender approves both the land purchase and the build in a single assessment. The land component settles first, with you paying interest on that portion while council plans are finalised and approvals come through. Once the development application and council approval are confirmed, the construction drawdown schedule begins. If you already own suitable land in Kingston, perhaps an existing block near the foreshore or in one of the older sections of the suburb, you're applying for construction funding only. Lenders will revalue the land as part of your application, and that value forms part of your deposit. Either way, you'll need enough equity or cash to cover your deposit plus costs like stamp duty on the land, council and utility connection fees, and lender establishment charges.

What happens if your build goes over budget

Lenders approve construction loans based on the contracted price, not cost overruns.

If variations or delays push your build cost higher than the original fixed price building contract, you'll need to cover the difference yourself or apply for additional funding. Lenders will sometimes consider a top-up if the increase is reasonable and your equity position supports it, but that's not automatic. In our experience, builds that stretch beyond budget usually involve custom design changes midway through or unexpected site issues like poor soil that wasn't flagged in the initial geotechnical report. Setting aside a contingency of 5% to 10% of the build cost helps you handle those situations without scrambling for extra funds. If you're doing a renovation rather than a new build, scope creep is even more common, which is why some clients opt for a home improvement loan with a buffer built in from the start.

Accessing construction loan options across lenders

Working with a broker lets you compare construction finance from multiple lenders in one application process.

Construction loans vary widely between lenders in how they structure drawdowns, what fees they charge, and which types of builds they'll fund. Some lenders are comfortable with owner builder projects, while others will only lend if you're using a registered builder with full insurance. A few lenders offer better construction loan interest rates if you're building a spec home or custom home for investment purposes, while others keep rates consistent across owner-occupied and investment builds. Having access to construction loan options from banks and lenders across Australia means you're not locked into one lender's terms or timeline. It also means you can match the lender to the type of build you're doing, whether that's a knockdown-rebuild in Kingston's older streets or a project home on a new block.

Converting from construction to permanent loan

Once building completes and you have an occupancy certificate, the loan converts to a standard mortgage.

This is called a construction to permanent loan, and most construction funding is set up this way from the start. The interest rate during construction might differ slightly from the rate that applies once the loan converts, particularly if you've locked in a fixed rate for the post-construction period. Your repayments shift from interest-only on the drawn amount to principal and interest on the full loan. Some clients refinance at this point if they've found a better rate elsewhere or want to access equity for other purposes, but most stay with the original lender since the loan was structured with the end goal in mind. If you're building an investment property, the loan usually stays as interest-only after conversion, depending on your loan structure and what you've arranged with your broker.

If you're planning a build in Kingston or weighing up whether construction finance suits your project, call one of our team or book an appointment at a time that works for you. We'll walk through your builder's contract, work out how the drawdown schedule aligns with your cashflow, and make sure you're set up with a lender that fits the type of build you're doing.

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