Building your new home is an exciting time. It’s a journey filled with excitement and anticipation as your vision comes to life from the ground up. Understanding the construction loan process, especially the stages of progress payments, is important to manage your finances efficiently. This article outlines how the construction loan is structured to work, how to plan for interest and fees on repayments, and when to switch your mindset from construction loan to a mortgage mindset.

Understanding the basics of construction loans

Construction loans are different from traditional home loans in that funds are released in stages rather than a lump sum. These "progress payments" are made directly to your builder, covering the construction's essential phases. The key points from the outset are:

  • Start construction within 12 months: Once your loan contract is disclosed, construction must begin within a year.
  • Equity contributions first: If your loan contract stipulates an equity contribution, you’ll need to use this equity before the construction loan funds are accessible.

The build stages and progress payments

As your construction loan is formally approved, the lender will send a letter to both you the borrower and the builder to confirm it’s time to start the build on your property.

Usually, your progress payments schedule follows five key stages:

  1. Slab (15-20% of funds). This stage covers the foundation being measured and poured, usually including a 5% deposit to the builder.
  2. Frame (20% of funds). External framing and walls, electrical and plumbing setups, gutters, and insulation are completed in this stage.
  3. Lock up (20% of funds). Being able to “lock up” your property due to all external walls and windows, doors, and roofing being finalised.
  4. Fit out (30% of funds). During this phase, fittings and fixtures for electrical and plumbing systems are installed.
  5. Complete (10% of funds). This final stage includes any contracted items like fences, detailing, and a thorough site clean up.

Authorising progress payments

Your builder will invoice you once each stage of your build is completed. These invoices must align with your building contract’s progress payment schedule. This means if you’ve varied your building contact after getting your loan approval, as your broker, we need a copy of the current contract.

As your broker, we make the progress payments based on your builder’s invoices.

Authorising invoices means you’re agreeing that your builder successfully completed the relevant build stage. To authorise payments, follow these steps:

  • Write your name, the date, and “I authorise payment of this invoice.”.
  • Sign via the lender’s guidelines.
  • State the loan account number (if you have more than one construction loan active).
  • Email the invoice to your broker for processing.

Planning for interest and fees

During your construction loan, interest will accrue as the loan progresses. Each time a progress payment is made, interest is charged, and it may increase over time as more funds are drawn, increasing the loan balance. Here’s what you can typically expect after the last progress payment is made:

  • Prepare for a last interest payment, often debited on the same day as the final progress payment.
  • Progressive drawing fees are typically charged as a lump sum.
  • Your loan terms transition to a standard mortgage, typically a 30-year term, which may switch to principal and interest repayments depending on your chosen structure.

You must ensure you have the right funds ready for the direct debit for the last progress payment.

Your partner in the building journey

At Get Real Finance, we’re here to guide you every step of the way, making sure you feel secure and informed through each stage. Whether you’re wondering about authorising a payment, understanding the interest structure, or simply want reassurance, our expert brokers are ready to assist.