Construction lending is released progressively
A construction loan is different from a standard purchase loan because the full amount is generally not advanced on settlement. Instead, funds are released through progress payments as the build reaches agreed stages.
The lender may require invoices, builder requests, inspections or valuations before releasing each payment. The exact process varies between lenders and contracts.
A common progress-payment sequence
The percentages below are only an illustration; the actual contract schedule controls the payments.
Deposit — 5%
Often payable at or around commencement, subject to the builder contract and lender requirements.
Slab — 15%
Foundation/slab stage.
Frame — 20%
Structural frame stage.
Lock-up — 25%
External shell reaches the contract's lock-up definition.
Fixing — 20%
Internal fixtures and fit-out progress.
Completion — 15%
Final stage, usually subject to lender completion requirements and any final inspection.
Why interest usually starts lower
If only part of the approved construction facility has been drawn, interest is generally calculated on the amount actually outstanding rather than the entire undrawn facility. As more progress payments are released, the loan balance rises and the monthly interest generally rises with it.
Actual construction interest is commonly calculated using daily balances and the lender's actual draw dates. A monthly calculator is therefore useful for planning but should be treated as an estimate.
Costs outside the building contract
A common budgeting mistake is focusing only on the fixed-price building contract. Demolition, site costs, landscaping, fencing, driveways, window furnishings, professional fees and temporary accommodation may sit outside the contract.
A separate planning contingency can help show the effect of overruns, but a personal contingency is not the same as an approved lender facility. If the project cost increases after approval, additional funding still has to be available and acceptable to the lender.