Unlock the secrets to progressive drawdown construction loans

Progressive drawdown means you only pay interest on the money the builder has actually been paid, not the full loan amount from day one.

If you're planning to build while you're on roster, this structure makes a difference. You're not funding the full loan from settlement on the land through to handover of the keys. Instead, the lender releases funds in stages as the builder hits milestones, and you only pay interest on what's been drawn down. That keeps your repayments lower during construction and aligns what you're paying with what's actually been spent.

How progressive drawdown works in a construction loan

The lender holds the full approved loan amount and releases it in instalments based on a progress payment schedule agreed with your builder. After each stage is completed, a progress inspection confirms the work, and the lender releases the next payment directly to the builder. You start paying interest only on the amount drawn down so far, not the total loan.

Consider a FIFO heavy diesel mechanic building in the outer suburbs with a fixed price building contract for $450,000 and land purchased separately for $200,000. The lender approves a total loan of $650,000. After the slab is poured and inspected, the builder invoices for the first progress payment of $90,000. The lender releases that amount, and the borrower starts paying interest on $90,000, not the full $650,000. When the frame is up and the next drawdown of $120,000 is released, interest is then calculated on $210,000. This continues until the build is complete and the full loan is drawn.

Most lenders require the builder to be registered and insured, and they'll want to see council approval and a copy of the building contract before they release the first drawdown. You'll also need to commence building within a set period from the disclosure date, usually six to twelve months, depending on the lender.

What you pay during the construction phase

During construction, most lenders offer interest-only repayment options. You're paying interest on the amount drawn down, which increases with each progress payment. Once the build is finished and you've settled on the completed property, the loan converts to a standard home loan with principal and interest repayments, or you can keep it interest-only if that suits your situation.

The other cost to account for is the progressive drawing fee. Lenders charge this each time they release a payment to the builder, usually between $300 and $500 per drawdown. If your build has five progress payments, expect to pay somewhere between $1,500 and $2,500 in drawdown fees across the construction period. Some lenders cap the total fees, others charge per inspection. It's worth checking this upfront because it adds to your out-of-pocket costs during the build.

Fixed price contracts and cost plus contracts

Most lenders prefer a fixed price building contract because it sets a clear loan amount and removes the risk of budget blowouts. The contract states the total build cost, the progress payment schedule, and what's included. The lender knows exactly how much will be drawn and when.

A cost plus contract, where you pay the builder's costs plus a margin, introduces uncertainty. The final amount can vary depending on material costs, variations, and site conditions. Some lenders will consider cost plus contracts if you're using a registered builder and there's a detailed scope of works, but they'll often require a larger buffer in the loan amount or a higher deposit to cover potential overruns. If you're planning a custom design or acting as an owner builder, expect fewer lenders to be willing to fund the project, and those that do will ask for more detailed documentation.

Progress payment schedules and what triggers each drawdown

The progress payment schedule is usually tied to specific milestones like base stage, frame stage, lock-up, fixing, and practical completion. Each stage has a defined scope of work that must be finished before the builder can invoice for that payment. The lender won't release funds until their valuer or inspector confirms the stage is complete.

In a scenario where the electricians and plumbers are scheduled for the fixing stage but the frame inspection hasn't been signed off, the lender won't release the lock-up payment. The builder can't pay sub-contractors until the previous stage is confirmed. This is why it's important to stay in touch with your builder and the lender during the process, especially if you're on a swing and can't inspect the site yourself. Delays in one stage push out the whole schedule, and if you're carrying interest on a separate loan for the land, that delay costs you.

Land and construction packages versus buying land separately

If you're looking at a house and land package, the developer usually has council approval in place and a registered builder ready to go. The lender can approve both the land and the construction under one loan, and the drawdown process starts as soon as the land settles. This can speed things up compared to buying land separately and then going through the development application process yourself.

When you buy suitable land first and then arrange the build separately, you'll need council plans and council approval before most lenders will commit to the construction funding. That can add months to the timeline. Some FIFO workers prefer this route because it gives them more control over the custom design and choice of builder, but it does require more involvement and a longer lead time before construction starts. If you're buying land with the intention to build, make sure your finance approval for the land doesn't expire before you're ready to start the construction loan application.

Owner builder finance and registered builder requirements

Most lenders won't offer construction funding if you're acting as an owner builder unless you're a licensed builder yourself or you've completed an owner builder course and can show detailed costings and a project plan. Even then, the number of lenders willing to fund owner builder projects is limited, and the interest rate is often higher to reflect the added risk.

If you're a FIFO heavy diesel mechanic with trade skills but not a registered builder, you'll generally need to engage a licensed builder to access standard construction loan options from banks and lenders across Australia. The lender wants the certainty that comes with a registered builder, fixed price contracts, and builder's warranty insurance. Without that, they're taking on more risk, and most will decline the application or require a much larger deposit.

How construction loans convert to standard home loans

Once the build reaches practical completion and you've done the final inspection, the lender conducts a valuation to confirm the property is worth the total loan amount. Assuming everything checks out, the construction loan converts to a standard home loan. Your interest-only repayments during construction switch to principal and interest repayments based on the full loan amount, or you can stay on interest-only if you've structured it as an investment loan or you're managing cash flow while on roster.

The construction loan interest rate is often slightly higher than a standard variable rate, but once the loan converts, you can refinance or renegotiate the rate if you're not happy with it. Some lenders offer a discounted rate on the converted loan if you've met all the drawdown conditions and stayed within budget. If you're planning to build your dream home and then hold it long-term, it's worth asking what the post-construction rate will be before you commit to the construction funding.

If you're ready to start the build or you've already secured land and need to sort out the construction funding, call one of our team or book an appointment at a time that works for you.

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